Smes' Available Financial Source and Why It Is Difficult to Be Raised?

Topics: Finance, Economics, Investment Pages: 6 (2126 words) Published: April 5, 2013
SMEs' available financial source and
why it is difficult to be raised?

Module code: ULMS767

Name: Yi Jiang
Student ID: 200893869

November 19, 2012

Supervisor: David Brookfield
SMEs' available financial source and
why it is difficult to be raised?

This paper will have a brief introduction of what kind of financial sources are available for small or medium-sized enterprises (SMEs). Moreover, these sources have been categorised as 3 different types, namely, first, Self-Raised ability; second, loan from bankers; third, support from government and local authorities. All these three type of sources are very important for SMEs. The difficulties of raising finance for SMEs have been analysed in this article. In addition, the bankers lending criteria shows it is very difficult for SMEs to get funding compare to those big firms. At the end of this paper, the success story of Chinese SMEs shows the importance of government and local authorities in helping them raising fund.

The source of finance available for SMEs
The source of finance for SMEs varies from different countries. To start a small business, basic fund need to be raised. The start fund can be raised by different ways. Take China as an example, domestic bank loans are more effective for bigger firms, while self-raised finance is more beneficial to smaller firms’ growth (Du & Girma, 2012). Due to the fact that the financial system was at a very early stage, thus it could not provide fund for those who want to start business. However, in some western countries where the financial system more advanced than those developing countries, start fund for SMEs can be raised by angel investment. Business angels can make a significant contribution to the financing of business start-ups (Brettel, 2003). This means in some countries like the Unite Kingdom, Germany etc., there will be more opportunities for people getting basic fund to start business. When the basic start fund ready for those SMEs, the next step for getting more fund can be categorised as three types. The first is the ability of SMEs, we call it Self-Raised ability which means the profit save from daily operation (Li & Liu, 2012). The advantage of this source is it is very stable, because profit is generated from daily operation and the amount of fund for SMEs is very predictable. However the disadvantage for this source is too slow and limited. If SMEs have very good profit margin and market expectation, want to enlarge firm size. This source probably is not suitable. The second financial source for SMEs is from bankers. This is a very important source for those SMEs who have got very big profit margin and good market expectation and expecting to get loan from bankers enable to enlarge firm size in short time (Berry, Grant & Jarvis, 2004). This is quickest way for those SMEs who want to enlarge firm size. Because when enough funds were applied to SMEs, they can invest in the product line, and then immediately quick response to the market, which will improve the self-raised fund ability as well. However to get the fund from bankers for those SMEs are not easy, further analysis will be given later on this paper. The third financial source for SMEs is from government policies or local authorities. This is very important for those developing countries who have got rich cheap labour resources. The Chinese economic miracle depends on the national monetary system and fiscal policy (Wang, 2004). For instance, one of the policies that were implemented in the 1980s in China was for those SMEs could avoid paying income taxes for 3 years for the start of business. The third financial source can be seen as macro based source of finance for those SMEs. These policies will give SMEs more savings, which will improve self-raised fund ability. Moreover, it also gives bankers more confidence to loan fund to SMEs as they are more confident those SMEs will pay back their loan. The three types of...

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