ACCA FM Syllabus E. Business Finance - Financing SMEs - Notes 2 / 3
SMEs can have trouble getting credit
Why problems?
No credit history
Little assets to use as capital
Tailored loans needed - so more admin
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).