You will agree with me that finance is the life blood of every business; big or small. Debt and equity finance are two main categories of sources finance that a company can use.
While big and established firms find it relatively easy to raise finance, small firms find it more difficult to raise fund/finance for their activities.
So many factors are responsible for this rather disturbing situation that small businesses find themselves into. Explained below are some of the difficulties faced by small businesses while trying to raise fund and their possible solutions.
- Uncertainty. The main trouble that small businesses face while accessing funds/finance is the problem of uncertainty. A small business is seriously handicapped by lack of past record that potential lenders can analyse to determine whether or not to furnish the small business with the required fund needed for expansion.
- Lack of credit scoring. Small businesses are often time neglected by credit scoring agencies. This singular act of the scoring agencies created a vacuum in one of the most important criteria required by banks and other financial institutions. And because of the uncertainties involved, banks always insist that their small business clients must provide an acceptable credit scoring and base their decision on this system so as to control exposure.
- Lack of adequate press coverage. Because banks and other financial institutions cannot get useful information that will give them insight into the activities of these small businesses, they force the small businesses to provide a detailed business plan, list of the firm’s assets, details of the experience of directors and managers and show how they intend to provide security for the sums advanced- you can imagine the stress.
- Entangled position. Entangled position is used to describe a situation where banks are unwilling o increase 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. Some banks even require that the owners’ equity in the business be increased before further credit line be given. You get the point now? They are a kind of entangled.
- 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 the medium and short term loans. The reason is because longer term loans are secured with mortgages against property.
- Interest rate discrimination. In general, banks and other financial institutions tend to ask for personal guarantees from owners of small businesses and will set interest rates at higher levels than those charged to big and established companies.
- Lack of market trust. The stock market may not have confidence in small businesses’ offer. Even when they have, they tend to lay or attach little value to it and this will make the firm to issue out more number of shares (just to raise little amount) that will in turn further dilute the small company’s earnings.
- Equity gap. It is difficult to find any wealthy person that will be sincerely willing to invest in small company (though is possible) when they are likely to be more attractive investment opportunities from bigger and more attractive firms.
- LACK OF EXIT ROUTE. A major problem with obtaining equity finance can be the inability of the small firm to offer an easy exit route for any investor who wishes to sell their stock.
There are a range of solutions which have been created to help with these problems.
I a bid to keep this article manageable, I have split this article, read up a free comprehensive work on sources of finance here. But, below are just few points that are not included in that work
A business angel network can bring potential investors and small companies together, with the added bonus that the business angel may have relevant experience and expertise to offer that could be useful in small company situations.
There may be other government initiatives designed to help small businesses which could also be investigated.
I hope the link above is useful but if by chance your question is not yet answered, then move straight to this forum and post your question, so that other members could proffer solution