ACCA FM Syllabus E. Business Finance - Financing SMEs - Notes ^{2 / 3}

Why problems?

1. No credit history

2. Little assets to use as capital

3. Tailored loans needed - so more admin

4. Their situation can change quickly

Large businesses are more price sensitive than SMEs as they have more choice - for SMEs the problem is not the cost but the access to credit

Solution

• Current liabilities

  These are a major source of finance and must be carefully managed in order to ensure continuing availability of such finance

The funding gap

• SMEs tend to be unquoted, so investors struggle to sell their shares easily - hence leaving SMEs with less options to get funding - so they turn to retained earnings, rights issues and bank borrowings

• Even rights issues are difficult as the original shareholders are probably friends and family!

• Then bank borrowing can also be tricky, due to the SMEs poor credit rating - meaning the SMEs need more business plans and additional security. Banks will also monitor their investment more closely.

• So therefore, a funding gap often arises when they want to expand beyond these means of finance but are not yet ready for a listing on theStock Exchange or Alternative Investment Market (AIM).