A Study on the Prospects of Small and Medium Sized Enterprises (Smes) in Uk
1.0 INTRODUCTION
In Britain, Small and medium sized firms (SME’s) are the companies whose turnover is not more than £22.8 million and the average number of employees is 250 or fewer. Despite small and medium sized firms having a major role to play in the growth of economy and generation of employment in UK, they have to face higher barriers to external financing than large firms which eventually limit their growth and development (Ardic et al., 2011). The difficulty in generating finance from external sources is mainly due to a number of reasons, which include small cash flows, inadequate credit history, lack of collateral, difficulties in proving credit worthiness, high risk premiums, under-developed bank-borrower relationships and high transaction costs (IFC, 2009).
There has been a decline in allotting loans to small and medium sized firms (SME’s) by banks after 2008 as the market now has become more cautious in assessing risk. It is seen that the bank lending in November 2011 has been 6.1per cent lower than that in 2010 (Department for Business Innovation and Skills, 2012). Financing of SME’s is mainly determined by “firm characteristics”, “owner characteristics” or both together. Firm characteristics include firm size, firm age, profitability, asset structure, growth and operating risk. Owner characteristics are generally determined by two approaches, one of them being firm owner’s personal characteristics (age, gender, race, education and previous business experience), and the second one being firm owner’s preferences, business goals and motivations (Ciaran Mac an Bhaird, 2010).
This report gives an overview on the challenges that are faced by them in generating finance for their sustenance, capital structure, financing decisions in SME’s and prospects that are ahead of them. It also covers various topics of finance and key theories that the article relates to. A study on the model of SME’s in other countries is also carried out to analyze the
In Britain, Small and medium sized firms (SME’s) are the companies whose turnover is not more than £22.8 million and the average number of employees is 250 or fewer. Despite small and medium sized firms having a major role to play in the growth of economy and generation of employment in UK, they have to face higher barriers to external financing than large firms which eventually limit their growth and development (Ardic et al., 2011). The difficulty in generating finance from external sources is mainly due to a number of reasons, which include small cash flows, inadequate credit history, lack of collateral, difficulties in proving credit worthiness, high risk premiums, under-developed bank-borrower relationships and high transaction costs (IFC, 2009).
There has been a decline in allotting loans to small and medium sized firms (SME’s) by banks after 2008 as the market now has become more cautious in assessing risk. It is seen that the bank lending in November 2011 has been 6.1per cent lower than that in 2010 (Department for Business Innovation and Skills, 2012). Financing of SME’s is mainly determined by “firm characteristics”, “owner characteristics” or both together. Firm characteristics include firm size, firm age, profitability, asset structure, growth and operating risk. Owner characteristics are generally determined by two approaches, one of them being firm owner’s personal characteristics (age, gender, race, education and previous business experience), and the second one being firm owner’s preferences, business goals and motivations (Ciaran Mac an Bhaird, 2010).
This report gives an overview on the challenges that are faced by them in generating finance for their sustenance, capital structure, financing decisions in SME’s and prospects that are ahead of them. It also covers various topics of finance and key theories that the article relates to. A study on the model of SME’s in other countries is also carried out to analyze the