Difficulties of SME's in obtaining funds

THE

MONGAP

Problems Faced By

Small Enterprises

in Obtaining Financing

EY

BY: John Razel Mapaye

You will agree with me that

finance

is the life bloodof every business;

big orsmall

While big and established firms find it relatively

easy to raise finance,

small firms

find it moredifficult to raise fund/finance for their activities

in accessing additional funding

Discouraged

facing difficulty

or

Small enterprises Because

are either …

Are SME’s discouragedWHY ?

Uncertainty

A small business is seriously handicapped by lack of past record thatpotential lenders can analyze

Are they discouragedWHY ?

Small businesses are often time neglected by credit scoring agencies creating a vacuum in one of the most important criteria required by banks and other financial institutions.

Lack of credit scoring

Are they discouragedWHY ?

Because of lack of useful information, they force the small businesses to provide a detailed business plan, list of the firm’s assets, details of theexperience of directors and managers and show how they intend to provide security for the sums advanced.

Stressful requirements

Are they discouragedWHY ?

Maturity Gap

It is particularly difficult for small companies to obtain medium term loans due to a mismatching of the maturity of assets and liabilities. Longer term loans are easier to obtain than themedium and short term loans

Are they discouragedWHY ?

Entangled position is used to describe a situation where banks are unwilling toincrease credit facility without a corresponding increment in security (collateral) from the part of the small business that in turn may be unwilling or unable to make such increment.

Lack of collateral

Are they discouragedWHY ?

Interest rate discrimination

In general, banks and other financial institutions tend to ask forpersonal guarantees from owners of small businesses and will set interest rates at higher levels thanthose charged to big and established companies.

Are they discouragedWHY ?

Equity Gap

It is difficult to find any wealthy person that will be sincerely willing to invest insmall company (though is possible) when they are likely to be more attractive investment opportunities from bigger and more attractive firms.

Are they discouragedWHY ?

Lack of Exit Route

A major problem with obtaining equity finance can be the inability ofthe small firm to offer an easy exit route for any investor who wishes to sell their stock.

Thank You