What is the Role of Capital Markets in SME Development?
6.2 For entrepreneurship and innovation to thrive, not only does credit need to be accessible, but there needs to be different types of financing. Capital markets are an important source of long term finance, especially since SMEs have been primarily dependent on banks for financing. A financial system that is built on the two pillars of banking and securities markets is stronger than a system that is built solely on banking credit since a well -functioning system would be comprised of various sources of finance. The choice of banks or the market would then depend on the needs of the SME. They are both crucial components of an economy, and it is impossible to say unequivocally which of the two systems is better for economic growth12. The capital market can and should compete head on with banks in the supply of debt finance to businesses including those to SMEs. From a regulatory viewpoint, it is necessary for the competition between the banks and capital markets to take place on a level playing field13. Therefore, capital markets should be actively promoted as an important alternative source of finance for SMEs, particularly long term finance through equity financing. Equity and debt financing can be made available as well as venture capital funds. Equity Financing 6.3 Equity investors primarily seek growth opportunities, so they are often willing to take a chance on a good idea and provide the needed capital. Equity financing is a strategy for obtaining capital that involves selling a partial interest in the company to investors. The equity, or ownership position, that investors receive in exchange for their funds usually takes the form of stock in the company. This provides small business owners with a broader scope in terms of financing as they gain access to multiple funding sources. In contrast to debt financing, which includes loans and other forms of credit, equity financing does not involve a...
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