Small enterprises are important for the economy. They make up a large percentage of the business sector, and create a considerable amount of revenue. Without them, the business world will be widely different. However, keeping a small business is more difficult than one may think. The challenge for many small firms is always the steady flow of finances and resources to keep the business going. Without these, the business will find it harder to thrive in the market. It will not be able to meet the demands of the consumers and it will find it hard to create a niche for itself in the business world where capital is primarily important.
However, it remains a truth that many small businesses find it hard to manage and sustain their finances. Thus, the term small firm finance gap. There have been contentions on its existence. Studies have proven that a gap can exist between small businesses and financing services. However, other studies indicate that there is no such gap, only mismatches between a business and the financial products immediately available to it. In this case, the concept is torn between two opposing ideas that may very well affect the concept of financing for small businesses.
This is the premise of this paper. In the same expectation, it aims to define small firm finance gap, prove its existence, and describe how its dynamics work. It should be noted that financing is a broad aspect of business. As broad as it is, it is also the most critical. Thus, upon defining the concept and proving how the gap exists, it is worth exploring how this gap can be bridged efficiently. Defined The small firm finance gap refers to the difficulty being experienced by small businesses in terms of securing finances for their firms, such as in terms of credit or fundraising.
(Mallick and Lynch, 2004) This is not new. It has long been known that small companies may have such difficulties for a myriad of reasons. Some business owners who are new in the field of entrepreneurship may find it difficult to finance because their own resources are limited. Some find it hard to secure a credit because they and their business have few assets. Some plainly do not know how, or do not know who to consult. The concept is true whether for businesses owned by well-off entrepreneurs. When a business is created, it assumes resources from its owner.
Through time, the business needs to show that it can become self-sufficient for the entrepreneur to consider that it is worth continuing. Otherwise, the business will have to close, or financing should be secured. According to Berry, Grant and Jarvis (2003), the concept is complex because there is a lack of financial products available for businesses and the available products may not be applicable to all businesses. Many banks would like to secure their investments, and so businesses will have to submit to stringent screenings in an attempt to secure additional finances for the firm.
This approach limits the financing to few businesses who can prove that their firms will earn in the future. The difficult aspect of this is that small businesses do not always have an already established portfolio like those of bigger companies. While many entrepreneurs are realizing the value of a portfolio, there are some who skip this important tool. Also, many small businesses are unfamiliar with how financing and credit processes go, giving them fewer chances at securing competitive loans and resources for their business. Yet it remains a point of contention if all of these boil down to small firm finance gap. Minding the matter
Personally, I think that there really is a gap on financing small businesses. While there are evidently efforts by some banks, government sectors, and financing institutions around the world, there is still a large percentage of small businesses who do not receive appropriate assistance on their finances. Berry, Grant and Jarvis (2003) state that in a study Europe, only ten banks actively support lending for small and medium enterprises. While this is encouraging that there are institutions that are seriously considering help for the small enterprises, it is alarming to note that the number of institutions is very small.
In fact, the number of these institutions is too small as compared to the number of small businesses opening every day. In concurrence to this, Gibson (2002) suggests that there are three avenues that businesses go to when they decide on financing their small firms. The majority goes to the equity of the owner, which is understandably a given. Because of the difficulties that business owners may encounter in developing a comprehensive financing scheme with the help of partners, many will just turn to their own bank accounts and financing abilities.
The top second is bank debts or loans. (Gibson, 2002) With the number of banks giving out salary, cash and business loans to individuals who qualify, this is the next most sought after by entrepreneurs. However, owner equity exceeds it because there are many underlying circumstances in securing a bank loan. First, business owners need to comply with requirements and screenings. Second, the interest rates and processing fees can add up to financial woes. Lastly, getting the wrong loan will put the business into a permanent damage.
The last resort for entrepreneurs is short-term financing. (Gibson, 2002) These loans work best for businesses that can pay a set amount on a given period of time. Fewer businesses are getting this because of the duration of time that the debt has to be paid. The longer the debt is paid, the higher the additional payments are. Financing possibilities Of these three, Gibson (200) identifies several factors where the financing will be most feasible. The strong points of a company are assessed in terms of what industry it belongs to, what assets it has, and its size.
Financiers will opt to lend to firms whose business falls on earning industries, or those which are expected to become lucrative in the future. The amount of assets, which can play as collaterals as well, is also a great determinant. The size of the business, which is the probable expandability of the small firm, is also considered. Contrary to popular belief, there is little regard on whether profitability will increase, and there is no consideration on the length of operation of the company, the age of the stakeholders, or the growth history.
(Gibson, 2002) This reveals a startling fact. Where small businesses are waiting to take their firms into years of experience and operation to add value to it, planning each period to make valuation better, there is little regard on it. Financing services would like to have more information on the type of business and the amount put into it—so the better the business stand of the firm is in the industry viewpoint, the better the leverage it has. Creative credit Short of the comprehensive bank and institutional loans, more and more businessmen are turning to plastic money.
Indeed, the credit card is the new financing gap bridge. O’Berry (2008) ratifies this, stating that credit cards has become the faster, easier, and better way to transact in terms of security on investments. In fact, credit cards are now part of many businesses’ strategies on their finances. This is good news but this is also the bringer of bad news. The growing number of entrepreneurs using their personal credit cards to build or expand their businesses shows that there really is a financing gap for small firms.
This sad truth is also compensated by the fact that it is getting easier and easier to secure a credit card these days. With securing the cards easier and the financiers elusive, it has definitely become the great resolve for entrepreneurs. Management factors With the small business financing gap proven, it is especially healthy to consider how managers view the gap, and how they are coping. This has been the premise of Landstrom and Winborg (1995), who concluded that more than 85% of small businesses in their study are financed by banks in some ways.
In retrospect, the credit card financing that is so popular today is in fact a bank-financed scheme, without the added business screening and paper work. In the same study, it has been noted that very few of the respondents expressed need for additional capital to ensure efficient operations. The need for capital is based largely on the need to expand, and those with such view largely used bank products for their necessities. (Landstrom and Winborg, 1995) This may contradict earlier statements proving that there is a financing gap with small businesses. Yet this contradiction alone may not be a viable basis.
Financing gap dynamics It can be said that an important indicator that small businesses are experiencing a small firm finance gap is the number of businesses closing down due to lack of resources. Paired with this, the number of institutions who are openly helping small businesses remain small. The ratio remains imbalanced. Small companies also experience the gap in a myriad of ways. Some needs money for developing a new product, which could spell a drastic change for the firm. Some are experiencing the need to expand—put up a branch in another location due to customer request, or put up a distributorship system.
In the same case, additional capital is needed. In many cases, businesses also need to take on additional staff to meet rising customer demands or additional equipment in which case additional capital is once again needed. In all instances, the firm needs a resource to turn to. As mentioned earlier, it can be the owner’s personal resources. But this may not always be the case. At a time when the owner cannot shell out the needed finances, the first things that may come to mind are banks and lending institutions. This is where the gap exists.
As explained, there are many things that can keep the small business from being able to borrow money for developing the business. Conclusions and recommendations Using the discussions herewith, it is safe to say that the concept of small business finance gap exists and it is widely experienced by small firms worldwide. Several factors have proven that the concept is true. First, the ratio between the number of businesses needing financing assistance and the financing assistance available does not correspond accordingly.
More and more businesses are closing down, and the closures are far faster than the founding of institutions and services. Banks are offering services, but apply the most stringent screenings that many small businesses cannot pass. Processing times vary, and the processing itself may pose problems for the entrepreneurs. Many studies prove this. Despite this, there have been claims that very few small businesses have financial requirements. However, this cannot be considered as a viable truth to disprove the concept.
It can be said that the evidences all point to the fact that there really is a gap that concerns financing small firms. The increased use of personal credit cards, for one, is a heavily weighted proof that formal financing schemes for businesses are ceasing to work for everybody. In view of this, businesses should note that there are many ways for them to thrive despite these difficulties. Use of alternative financing methods such as credit cards, personal loans or debts and the likes can prove helpful. Banks and institutions, of course, are still worth a try.
However, financial creativity and proper management are tantamount to any business’ success. To conclude, businesses should prepare themselves for the gap, but learn to be more creative and proactive when dealing with it. References Berry, Grant and Jarvis. 2003. Can European banks plug the finance gap for UK SMEs? [Online]. Available at: http://www. accaglobal. com/publicinterest/activities/research/reports/smallbusiness_research/rr-081 (Accessed: June 12, 2008). Gibson, B. 2002. An international comparison of small firm financial structure. Available at: http://www. sbaer. uca.
edu/research/icsb/2002/auth_letter/pdf/031. pdf (Accessed: June 12, 2008). Landstrom, H and Winborg, J. 1995. Small business managers’ attitudes towards and use of financial sources. Available at: http://www. babson. edu/entrep/fer/papers95/landstr. htm (Accessed: June 12, 2008). Mallick, R. and Lynch, M. 2004. Available at: http://www. fma. org/Chicago/Papers/Credit_Gap. pdf (Accessed: June 12, 2008). O’Berry, D. 2008. Credit cards filling the cash flow gap for small businesses. Available at: http://www. allbusiness. com/economy-economic-indicators/economic-conditions-growth/8454431-1. html (Accessed: June 12, 2008)