ACCA FM Syllabus E. Business Finance - Measures to ease the financing problems of SMEs - Notes ^{3 / 3}

So SMEs may turn to business angels (see below) and the following…

Venture Capitalists

Most major providers of finance have specialist 'venture capital funds’.

They provide capital - often up to 5 years for start ups and high growth companies - in return for an equity stake

However they don't often invest under £100k in the UK, so for smaller amounts - a business angel is needed

Banks

With little security and banks being risk averse - often guarantees over the loan are needed

Government solutions

Governments have adopted a two-pronged response to increasing the attractiveness of SMEs:

• increasing marketability of shares

• tax incentives for investors.

In addition they have provided specific assistance in a range of areas (see below).

Making shares marketable

The development of small firm markets, such as the AIM in the UK and the Growth Enterprise Market (GEM) in Hong Kong, is designed to bridge this funding gap and provide both a venue for further fund-raising for SMEs

Business angel financing

Business angels are wealthy individuals who invest in start ups (and early growth businesses), and get shares in the start up.

This is therefore a high risk for an angel and so high returns are needed - meaning it can be expensive for the SME also ultimately

Most investments are around £25,000 so they fill the gap between venture capitalists and debt finance

They offer expertise and further funding as the company grows

Government assistance

Governments can encourage new businesses by guaranteeing loans for SMEs with insufficient security - although the SME will pay a premium for this

Governments can also offer grants (for example for employing staff in certain industries and regions)

There is also the possibility of small start up loans and tax incentives

Supply chain financing

This simply means taking credit from suppliers – typically 30 days. This is very helpful to new businesses. 

Typically, suppliers to new businesses will want some sort of reference, either from a bank or from other suppliers (trade references). However, some will be prepared to offer modest credit initially without references, and as trust grows this can be increased.

Crowdfunding / peer-to-peer funding

This has become increasingly popular in recent years - where SMEs take advantage of the the internet to reach many individuals who individually couldn’t provide sufficient funding but as a whole, together can

Companies show their products, their business plans and latest financials online and potential small investors can then decide whether to invest or not

Often a minimum level needs to be reached before the investment goes ahead