Sample Essay

The scarcity of financial resources and lesser options available for financing causes major problems for SMEs. The main constraint in the growth of SMEs is inadequate and low access to financing alternatives. Banks, financial institutions and investors prefer larger organisations for investment as these organisations have an advantage of economies of scale, properly audited and published annual reports, collateral or guarantee required for obtaining a loan and credit ratings which help financial institutions and banks in making decisions about lending money. SMEs on the other hand are unable to provide adequate collateral, have lower management skills and inability to generate stable cash flows which eventually causes banks, financial institutions and investors to refrain from investing in these companies.

SMEs face problems with financing as investors and banks are reluctant in lending or investing in these enterprises due to several reasons. The first reason is that creditors, banks and financial institutions view SMEs as high risk companies due to a low level of assets and insufficient capital. The second reason is the information asymmetry which is caused mainly by lack of financial records and unavailability of financial statements. The cost of transactions is quite high and would not be recovered from low level of financing required for business operations in SMEs (OECD 2002). A survey conducted on South African SMEs also reflected that low sources of business finance and poor financial management by company personnel were the main reasons for failure of most enterprises (Creamer Media 2003).

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