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SMEs - SME finance and capital formation
| Guest post by: Dr. Rob Smorfitt |
Article Overview: Where should developing countries focus their attentions in respect of SME finance?
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Free Download - SMEs – SMEs struggling in South Africa. Why? By Dr. Rob Smorfitt |
SMEs - SME finance and capital formation
There is a global trend for governments to blame banks for "a lack of SME finance", particularly in developing countries. However, while I am not a fan of banks, I believe this generalisation to be inaccurate. If banks are guilty of anything it of dishonesty. They just do not have the "ability" to tell SME owners that there business ideas are in fact poor, or that as entrepreneurs they engender no confidence in lenders. They could reduce the heat by being honest.
The problem is that these governments are failing in their SME efforts and have no idea on how to correct the situation, but that forms the basis of a separate article.
What is a fact is that they need to address the question of capital formation. My experience is that governments do not look at what capital is really available. Quite often the only area of finance shortage relates to growing SMEs, in particular high growth enterprises. As usual there is no consensus on what can be considered a high growth enterprise, but it is a minimum of 20% to 25% annual growth each year.
These enterprises are those least likely to get funding from a bank, as the banks often categorise these enterprises as overtrading, and will not fund their growth. This in itself is not a problem, the problem is that in most developing countries, there are no formal networks of angel funders, venture capitalists and/or private equity funders. Current research shows that the bulk of new jobs are created by these high growth enterprises.
Therefore these governments would achieve better returns on their SME development investments by encouraging the establishment of formal networks as discussed. Countries in the developed world, such as the UK, have created specific tax incentives to facilitate the growth in this area.
Governments need to stop placing their faith in unsubstantiated urban myths and legends in respect of SME development, and do some proper research. Most of them have no clear idea on what finance is available and who the intended clients are, within their own countries.
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Summary: HUMAN CAPITAL FORMATION AND FOREIGN DIRECT INVESTMENT IN DEVELOPING COUNTRIES
Article Tags: angel, capital, equity, finance, formation, funding, private, SME, Smorfitt, venture
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About the Author: Dr. Rob Smorfitt RSS for Dr. Rob's articles - Visit Dr. Rob's website Have an MBA and a PhD in entrepreneurship. Three key areas of ongoing research are entrepreneurship and innovation in large business strategy, the impact of legislation on SME development and SME finance. Run my own SME blog at http://sme-smb-smme.blogspot.com as well as an entrepreneurship and innovation for large businesses blog at http://innoveur.blogspot.com I have been self-employed since 1982. I have started or purchased in excess of 50 businesses since then. Most were sold again and a few were shut down because of a lack of profitability. Many were run by staff or family while I worked full time in my bigger businesses. Author of 6 books. Written articles for various magazines, newspapers and websites. Experienced in research within developing countries.
Click here to visit Dr. Rob's website  
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Related Forum Posts
Using your home for collateral is one thing, but...
- Putting up your home for collateral is one thing, but utilizing the equity in it to finance a business is a whole other ball game and could be damaging in the long run.
Do you know that if you completely finance your business with home equity instead of a busienss loan you will not be able to obtain a working capital loan later down the road? should you run into some financial troubles or wish to expand or remodel with working capital loan, you won't be able to get it if you finaced by personal means. It's always best to build a track record with a lender for future use and it's always better to be in business debt rather than personal debt. I always say: "You wouldn't hire a Plumber to do the Electrical in your home, so why would you finance a business using your home equity? Equity loans are for your home, business loans are for your business.
You may however, utilize some of the equity in your home for loan down payment (depending upon your qualifications) and we can help determine whether that would be more helpful or damaging to your loan by pre-qualifying you for free.
when using your home for collateral, it doesn't necessarily mean you will lose your home (in the event you cannot pay your loan payments). Lenders are always willing to work with you once you have a loan with them and they have already taken on the risk. they typically only utilize what they lien if nothing else can be resoloved (so it's basically a last resort) to go after what they lien.
Getting financed
- It has always been my experience that it will always be better to be in business debt rather than personal debt, but I suppose when you can run your business out of your home and have so little overhead, it could be better to simply finance yourself and secure a business line of credit just in case you need it. On the flip side, when it comes to businesses outside the home, you want to secure financing and SBA is probably the way to go (depending upon what your total project will cost). Banks that provide SBA loan products prefer the loan be 100K or more. Then there are Micro Loans (loans that go up to 35K) and Signature Loans that are unsecured loans and mainly based on your credit score (680 or higher), they can finance anything in between and then some. It's been said in some of my other posts that when you obtain business loans its beneficial because you are building a track record with a lender for future use. Should you get financed via a business loan and later you need additional working capital to keep your business going (or to expand) the lender is going to be more apt to help you because they have already taken on the risk of your loan. Now, they would prefer you better yourself whether it be expansion or to pull yourself out of a hole so you do not default on the 1st loan... and if that means helping you further, believe me they will do it. However, if you finance yourself, who's going to help you with additional working capital if you run into trouble? Lenders won't help you because you financed yourself...they tend to take on the attitude that you didnt need them before, so why now? What if you had originally financed yourslef with home equity and still haven't paid it back...now you have a first mortgage a second or Home Equity line of Credit and your business is in touble and you have no way out.
Re: An additional Need when requesting Funding
- [quote="speechlady":tvlfm6si]In addition to capital, it is important that the individual who is requesting funding, consider any assets that they may have which may allow for a "better type of funding" to help with their projects.[/quote:tvlfm6si]
While I agree with the business plan information, I do not agree with the above statement, because although a person may be able to secure a better rate with (say) a home equity loan, they are not building a track record for future use with a business lender and that is not beneficial. (Especially if you are a franchisee as most franchisees open more than one unit) and therefore stand to benefit more from building a relationship with a business loan lender from the get go (but this advise definately holds true for anyone going into business. In addition, should you need working capital now or in the future, you may not have enough home equity to support that too. Lenders do not typically approve working capital loans when you finance the business via personal funds.
Finance is the basic requirement
- Without finance no one is going to stand next to you, your employees join your company looking at your financial situation and growth, if you don't have enough finance then better do a job.
Re: The Best Method for Online Marketing
- A good writing style and information is certainly useful. For all readers
continue to write such excellent articles. Thank you.Thanks for sharing
this formation. Valuable.enjoyed reading it…
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