Problems Faced By Small Businesses in Raising Finance
A company can use either equity or debt finance as its main sources of finance. Large institutions find it relatively easy to seek or raise finance but small firms face difficulties in raising finances to augment their businesses. Analysts such as Igor Cornelsen have noted that finance is regarded as one of the most imperative inputs for all business entities.
When raising debt finance, most small firms are faced with the challenge of uncertainty. Most small entities do not have past records and thus, making it difficult for the financial institutions to furnish them with the required fund for expansion. Credit scoring agencies often neglect small entities when making these scores. To this end, banks lack platforms for basing their decisions and thus, failure to extend loans to small businesses. Since most small businesses lack sufficient financial records, they are often required to provide detailed business plan, lists of liabilities and assets, description of directors and managers as well as their security for the loan. Such requirements leave many small businesses locked out of the opportunity to access business finances.
Most banks remain in an entangled position in the sense that they seek an increase in security for them to increase the credit facility to be extended to small businesses. It is significant to point out that small enterprises lack sufficient security (collateral) to raise debt finance. Mismatch of the maturity of liabilities and assets makes it a herculean task for small companies to access medium term loans. Long term loans are easily accessible compared to the short term and medium loans. This is because long-term loans are usually secured with mortgages. In addition, most banks and other financial institutions have a propensity to ask for personal assurances from proprietors of the small businesses. Banks charge higher interest rates and thus, making it quite difficult for the small entities to access debt finance.
Small businesses find it intricate to access equity finance because most wealthy persons are usually not willing to invest in them. Small entities cannot make it to the stock market. This way, these businesses cannot have the privilege of owning shares that they can float to the market in order to source for finances in the form of equity shares. Small entities lack the offer for an exit route especially for investors who wish to dispose their stocks in such enterprises. In order to raise finances, small businesses should create angel networks that can attract potential investors, who come with expertise and finances.
Small businesses lack sound financial records and thus, making it an uphill task to raise finances. Debt and equity finances are considered as the main sources of finance. Banks and other financial institutions have tough financial requirements, which small businesses find difficult to meet.