Entrepreneurship (Coursework Sample)

Discuss and evaluate to what extend entrepreneurs and small and medium sized enterprises are able to access external finance?
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Introduction
The interest in the role of mall and medium sized enterprises (SME’s) in the development process continue to be infront of policy debates in developing countries.
Numerous studies have actually showed that small and medium enterprises are financially more constrained than many large and are actually less likely to have acces to a formal finance. There has been very little cross-country evidence on the extent to which size is a more and actually more decisive factor in determining growth obstacles or any acces to finance.Further little cross country evidence has been accumulated on the policies to overcome SME’S growth obstacles and foster their access to finance. The recently compiled cross-country firm-level databases have facilitated a more and more detailed research and have enhanced our understanding of policies to foster SME’s access tofinance.
While around half of businesses use external finance, a smaller proportion (around 20%) is actually seeking finance at any one time. Of those who have used external finance in the last year, bank finance is still the primary source of finance. In the last year, 28% of all SMEs have used an overdraft and 11% have used a bank loan.
While the majority of the firms seeking finance do get it,(74% of SME employers), there are a number of structural market failures that restricting some valuable SME’s from getting finance.
This is due to imperfect or asymmetric information between finance providers and small businesses. This actually manifests itself in a debt funding gap that affects businesses that lack collateral or a good track record; and in the equity gap affecting SMEs seeking an average of between £250,000 to £5m of equity finance. There also exist cyclical issues relating to the supply and demand of finance.
Access to debt finance is now harder than before the credit crunch.
Prior to 2008, the banking market was more crowded with banks competeing for market share, but the market has now bwcome more cautious about assessing risks.As a result, the stock of bank lending to SMEs peaked in 2009 and has been declining ever since for example the stock of bank lending in November 2011 was 6.1% lower compared to a year ago.
The decline in the stock lending is actually affected by both the demand and supply side factors. There is evidence indicating that SME’s are reducing demand by repaying existing bank debt (deleveraging), and more generally putting off investment plans in light of economic uncertainty.
Actually the value of applications by SMEs for the new term loan and overdraft facilities in the six months to February 2011 was about 19% lower than in the same period a year earlier. Around 3% of all SMEs have put off borrowing due to the current economic climate.
Although almost most businesses can obtain the finance they need , actually 74% of those SME’s employers seeking finance over the previous 12months, managed to obtain some little finance .
It is now harder to obtain than in year 2007/08 when 90% of those seeking finance obtained it. This is equivalent to 21% of SME employers that sought finance in year 2010 being unable to obtain any finance from any source, a significant increase from the 8% seen in the year 2007/08. This is because banks now are also risk averse due to credit crunch and because they are also required to hold more capital/liquidity by new financial services regulation.
Equity finance is an important source of finance for high growth potential SMEs.
Even though only around 1-2% of SME’s looking for external finance seek equity finance (also known as "risk capital”), it is especially important for those early stage businesses with the highest potential for growth.
However, the venture capital market has been heavily affected bythe economic conditions with a 31% decrease in the value of investment in 2010 compared to the previous year.
There have been an increase in the use of other types of SME finance including asset based finance and in addition, there have been some recent improvements in liquidity on SME public equity markets, e.g. AIM
Governments have put in place various interventions to address such issues.
Various governments have a range of policies for increasing the supply of finance to SME’s and addressing their market failures preventing some viable SMEs from raising finance. These include:
1 Enterprise finance guarantee: EFG is a loan guarantee schemethat addresses the market failure of lack of collateral or track record by providing a Government guarantee of up to 75% of the individual loan amount in the event of a default.
2 Enterprise Capital Funds: These are commercially managed venture capital funds operating in the equity gap that provide equity finance to high growth potential SMEs initially seeking up to £2m of finance.
Ensuring that SME’s have access to finance should be a priority of any government.
Different finance types
Almost half of SME’s do not use formal sources of external finance, instead they rely on trade , credit from their suppliers or retained earnings. Half of SMEs who use at least one form of external finance most commonly use bank funding; either loans, credit cards or overdrafts. A minority use equity finance.
SME – Finance monitor
While most of the bussineses use external sources of finance , a smaller propotion actually seeks finance at any one time. Survey evidence suggests that round 20% of SME employers sought finance over the last 6 to 12 months period.
Actually the loan finance sought is £180,000 (The Median £10,000), but overdrafts are smaller at £29,000 (median £5,000)
SME –employer’s type of finance sought
Small business survey 2010
Different types of finance reflect different financing needs
The wide variety of different types of finance available reflect a different diversity of SME characteicts and their specific needs.
within the literature a funding escalator is always put forward with different types of finance corresponding the to different stages of various business development. For example a new business may start up with high growth ,potentially may use high grant funding to develop a product before moving onto funding from business angels, venture capitalists or banks once the product is developed. The business may sub sequentially ,move to private venture. However a funding escalator may be too simplistic as business may not necessarily go trough each and every stage in turn.
Finance escalator for high growth potential
Debt finance is the most widely used form of finance as its generally one of the atleast expensive ways to raise finance. Its most suitable for established lower risk business with stable cash flow.
Here Loans and overdrafts are the most common forms of debt finance.
Equity finance (especially venture capital) it is for higher risk takers risk businesses, a number of which have the most greatest potential for growth.<...