The Bolton Committee (1971) was the first to attempt to resolve the definition problem by implementing an "economic" definition and a "statistical" definition. According to their economic definition, a business is considered small if it meets the following requirements. First, whether the owner is part of the management or manages it personally and not through another formalized management structure. Second, if the market share is relatively small and finally if its is governed in the sense of not being part of a larger company. The HMSO 'Wilson' Report (1979) identified problems for small and medium-sized independent owner-controlled enterprises employing fewer than 200 or 500 employees (SMEs). More recently, the European Commission (EC) has also classified the small business sector into three components: micro businesses with 0 to 9 employees, small businesses with 10 to 99 employees, and medium businesses with 100 to 499 employees. Say no to plagiarism. Get a tailor-made essay on 'Why violent video games should not be banned'?Get the original essay Banks remain the main provider of external finance to SMEs (Cosh and Hughes, 2003), although there may be various financing constraints (Kotey, 1999). ; Fraser, 2005). Access to finance is influenced by financing preferences (Hamilton and Fox, 1998), such as pecking order theory (Howorth, 2001) or risk aversion of banks. This risk aversion can lead to a preference for financing less risky companies or "better borrowers" (Cressy and Toivanen, 2001), which can exclude women and ethnic minorities who may not appear as credible to lenders. . There is certainly evidence that ethnic minorities have difficulty raising finance (Ram and Smallbone, 2001; Ram and Deakins, 1996; Bank of England, 1999). Furthermore, I will illustrate a literature review on SME financing barriers in various methods of mobilizing external capital. . I also discuss the requirements that management must meet and the problems that arise from them. Additionally, I state some solutions to these problems and recommendations that a student may find interesting and useful. Importance of SMEs and major financial barriers. The role of MSMEs in innovating and promoting industrial development, job creation and market competitiveness has been recognized by both academics and policy makers F([1] Beck et al ., 2005; [2] Thurik and Wennekers, 2004; [3] Ayagari et al., 2003; [4] Storey, 1994; It is known that both developed and developing economies place great importance on micro-small-medium enterprises. Small and medium-sized enterprises SMEs contribute significantly to the economy, particularly in developing countries. Formal SMEs contribute up to 60% of total employment and up to 40% of national income (GDP) in emerging economies. (World Bank, 2015) Internal and external barriers. Depending on the economic situation of the country, the obstacles to business change. For example, in developed countries they have problems with high competition or lack of innovation, while developing countries have problems with labor resources or limited availability of financial services. For example, about 97% of businesses in Mexico and Thailand are micro-small businesses Kantis, Angelli and Koenig (2004) Timmons (2004). In the United States, more than 96% of businesses have fewer than 29 employees (US Small Business Administration and Census Bureau, 2006). Institutional barriers togrowth of SMEs “Related literature has shown that access to external financing is determined by a country's laws and regulations. financial environment” (La Porta, Lopez-de-Silanes, Shleifer and Vishny, 1997, 1998; Demirgüç-Kunt and Maksimovic, 1998; Rajan and Zingales, 1998). “A direct implication of these studies is that in countries with weak legal systems and, therefore, weak financial systems, businesses obtain less external financing, which translates into lower growth. » Beck et al., (2008) The seminal literature on entrepreneurial startups suggests that liquidity constraints can hinder or even prevent someone from starting a new business (Evans and Jovanovic, 1989; Holtz-Eakin et al., 1994 Blanchflower and Oswald, 1998). Traditionally, the focus is on obstacles created by commercial banks or private equity funds, or on imperfections in the broader institutional environment (InfoDev, World Bank, 2004). However, it is important to note that SMEs sometimes have a negative attitude towards loans and bank financing (Howorth, 2001). Therefore, financial decisions have considerable influence on the demand side. (InfoDev, World Bank, 2004) It was also claimed in the 1980s in the United Kingdom that when times were tough, the small businesses most dependent on banks protested vigorously against the apparently unsatisfactory nature of their relationships with them. . (Binks et al. (1992), Cowling et al. (1991), Bank of England (1993). For example, the impact of the "credit crunch" in the United States in the early 1990s and the effect of market consolidation Banking sector issues on the availability of credit for small businesses have also been the subject of much research in recent years. As a result, monetary policy shocks. may have largely affected small business financing, giving rise to substantial research and debate on the mechanism such as "credit channels" that monetary policy uses to raise funds. capital and lender constraints in terms of SME management Much empirical and subjective research aimed at identifying the causes of small business failure seems to focus on internal business factors - the main one of which is often seen as. “mismanagement”, invariably followed by financial deficiency such as undercapitalization or insufficient cash flow. Research published by Dun and Bradstreet (1991) Researchers have shown that a small business is characterized normally. by the unique set of skills and preferences of a single person, the leader of the company. Therefore, long-term outcomes, in terms of the success or failure of a specific small business, can be strongly influenced by the personality, expectations and abilities of the founder and by his or her fundamental motivation in creating the business. business. Jennings & Beaver, (1995). It should also be noted that entrepreneurs and owners can destroy their business through the abuse or mismanagement of the power of their position. Castor and Jennings, (1996). Being an entrepreneur-manager-owner requires a high level of knowledge and innovation, some of the skills required are illustrated in the tables above. If it fails to perform this task, the company may undergo a period of business development, leading to a certain amount of growth and expansion, during which each role may be undertaken by separate individuals ( Jennings and Beaver,1995). Irwin et al., 2010 published research showing several factors (see Appendix 1) at work that together make it more likely that some groups are less able to articulate their proposals effectively or are less likely to be able to put forward implement their proposals. commercial proposals are effective and are therefore considered too risky by banks. Thus, it is recognized that certain personal characteristics are indicative of a higher risk (young people, for example, without a background, without savings and without guarantee). But they therefore believe that there is no discrimination based solely on personal characteristics. Irwin et al., A 2010 study of Barclays' successful business clients shows that personal savings were the main source of finance for owner-managers, accounting for 70% of all companies studied. Owner-managers who used bank loans represent (7 percent of business bank loans, 8 percent of personal bank loans and 13 percent in total). Additionally, Fraser (2005) found that 10 percent of businesses faced financial constraints, but Irwin et al. (2010) found that about 16 percent of respondents experienced difficulty raising funds to start their business. The same survey suggests that ethnic minorities actually encountered more difficulties in mobilizing financing (Table III, Annex 1). Only 13 percent of white respondents reported financial constraints, compared to 22 percent of Asians, 50 percent of blacks and 21 percent of other ethnic groups (including Chinese, etc.); this conclusion appears to tentatively confirm previous studies (e.g. Curran and Blackburn, 1993; Ram and Deakins, 1996; Bank of England, 1999; Ram and Smallbone, 2001). Mobilizing external debt finance Banks remain the main provider of external finance to SMEs (Cosh and Hughes, 2003), although there may be various financing constraints (Kotey, 1999; Fraser, 2005). Access to finance is influenced by financing preferences (Hamilton and Fox, 1998), such as pecking order theory (Howorth, 2001) or risk aversion of banks. This risk aversion can lead to a preference for financing less risky companies or "better borrowers" (Cressy and Toivanen, 2001), which can exclude women and ethnic minorities who may not appear as credible to lenders. . There is certainly evidence that ethnic minorities have difficulty raising finance (Ram and Smallbone, 2001; Ram and Deakins, 1996; Bank of England, 1999). In business financial management (Arnold, 2013), financing is considered to face 3 main obstacles that can prevent the financing process of an SME. These are information asymmetries between small businesses and lenders or other investors, the underlying risk associated with small-scale businesses, and the transaction cost associated with managing SME finance. Berger and Udell (1998) stated that high-risk, high-growth firms whose assets are mostly intangible obtain external capital more often, while low-risk, low-growth firms whose assets are mostly intangible most tangible assets more often receive external debt. Studies by Binks (1992) and Deakins and Hussain (1993) focused on imperfect information within credit markets and the impact of information asymmetry on small business borrowing. On the other hand, Berger and Udell (1998) identify thatSmaller companies are generally not publicly traded and therefore are not required to disclose financial information on Forms 10K (annual reports) and their data is not collected on CRSP (Center for Research in Securities Prices) tapes. ) or other datasets typically used in corporate finance research. Data provided by the World Bank demonstrates that “entrepreneurs typically have inside information about their businesses that is not easily accessible – or at all – to potential lenders or outside investors.” (InfoDev, World Bank, 2004) This leads to two problems, the first concerning the lender or investor who is not aware of the risks involved and the real value of the investment. This can also lead to financial difficulties because potential loans will not have a sufficient rate due to asymmetric information which will result in a high-risk portfolio for the lender. However, Kon and Storey (2003), for example, found cases of potential borrowers who may offer entirely reasonable business proposals but who "do not apply for a bank loan because they think they will be rejected." . Second, “once lenders/investors have provided financing, they may not be able to assess whether the business is using the funds appropriately” (InfoDev, World Bank, 2004). Irwin et al. also stated that some people have certain characteristics that make them more likely to fail to obtain the financing they need, Irwin et al. (2010). To further address this issue, bankers can avoid financing an SME and adopt a cautious approach towards SMEs. InfoDev, World Bank (2004) identifies that this problem is more encountered in developing countries in small businesses than in large ones due to lack of detailed information or inadequacies in accounting and data analysis. Irwin et al (2010) also stated that there is sufficient and easily accessible funding, but proposals are perceived as unviable, or applicants are seen as unable to meet targets, or guarantees are insufficient , and therefore the whole proposition. it's too risky for the banks. From the point of view of lenders, the lack of guarantees will prevent them from financing SMEs further. InfoDev, World Bank (2004) identifies a number of reasons why SMEs are riskier than large companies. First, large companies have an advantage in the competitive environment in which SMEs also operate: they have a higher failure rate and a more variable rate of return. Second, SMEs have a lower level of capital and human resources in economic activities compared to large companies. Third, the problem of inadequate accounting systems, which reduce the level of accessibility and reliability of information regarding management accounting measures of profitability and repayment capacity. The World Bank also states that, regardless of risk profile considerations, managing SME financing is a costly activity. InfoDev, World Bank, (2004) The transaction costs of taking out a loan are (i) administrative costs, (ii) legal costs and (iii) costs related to the acquisition of information. In the case of smaller loans or investments, it is more difficult to recover these costs. InfoDev, World Bank, (2004). This problem is more critical in developing countries for the following reasons: (i) lack of systemsof adequate management information in financial institutions, (ii) the underdevelopment of the economic industry and (iii) the poor state of certain public services, such as the registration of property titles and guarantees. InfoDev, World Bank (2004). Finally, Chang Andrew, under the leadership of the Federal Reserve, published a paper suggesting that bank consolidation has worsened market failures. Chang, (2016) Equity Finance As stated by Arnold (2013), the financing gap between larger, more mature companies and SMEs is bridged by various methods of raising equity or funds with or without the interpretation of Arnold Scholarship, (2013). For example, private equity funds, venture capital and angel investments. The private equity industry has seen rapid development over the past 40 years. Arnold (2013). Furthermore, Bergemannna & Ulrich argue that venture capital is now the financing method of choice for projects where “learning” and “innovation” are important. They also say that the innovative nature of the projects carries a significant risk of failure, with only 20% being high-return investments. Bergemannna & Ulrich, (1998) Berger & Udell suggest that financial intermediaries play a critical role in private markets as producers of information capable of assessing the quality of small businesses and resolving information problems through selection, contracting and monitoring activities. (1998). The intermediary may also review the company's risk profile and appropriate assessment, as well as assess compliance and financial condition to help the company engage in operating activities or strategies. This can be done by directly participating in management decision-making by venture capitalists or by renegotiating waivers of loan covenants by commercial banks. Berger and Udell (1998) Additionally, Berger and Udell (1998) stated that angel investment is often necessary at a very early stage of the business, while the entrepreneur is still developing the product or business model. Angel finance is indifferent to other methods of mobilizing external finance and is used for direct financing through a participation contract. This is also necessary when small-scale production has started with limited marketing effort. This "start-up stage" is often associated with the development of a formal business plan which is used as a sales document to obtain angel financing. Berger and Udell, (1998). Arguably, angel investors are willing to inject the required amount of capital without providing financial expertise or control over the business. Wetzel Jr concluded that angel investors typically provide funding between $50,000 and $250,000, which is less than a typical venture capital investment. Wetzel Jr., (1994). Berger and Udell, on the other hand, stated that unlike the angel market, the venture capital market is intermediated Berger and Udell (1998). Tyebjee and Bruno identified the processes as follows: They take funds from a group of investors and contract portfolios to invest with informationally opaque issuers. In addition to selection, contracting and monitoring, venture capitalists also determine the timing and form of investment withdrawal. Tyebjee and Bruno (1984) and Gorman and Sahlman (1989). Furthermore, Berger & Udell explained that the minority of companies will be successful enough to enter into.