Entrepreneurial Finance Management - Essay Example

?Entrepreneurial Finance Contents Page 2 Introduction 3 Background 3 Objective 4 Limitations 4 Literature review 4 Methodology 9 Findings 9 Discussion 10 Conclusion 12 Recommendation s 14 References 15 Abstract The role of Small and Medium Enterprises (SMEs) mostly known as SMBs (Small and Medium Businesses) in the US in the economic development of the countries worldwide has been phenomenal over the period of time. The study seeks to analyze the statement, “Although ethnic entrepreneurship has been relatively well researched, the distinctions between the various ethnic groups make it difficult to construct an over-arching set of policies with regard to SME ethnic minority finance”. The SMEs are mostly started by youngsters with vision and drive, and in many cases, the businesses started at a modest level could grow as a big business empire. The failure stories may be mainly due to lack of financial support at the initial stages or lack of experience in running the business. The community of SME promoters needs to be encouraged and supported by the government for the balanced economic development in the country. Apart from the financial assistance, they need to be provided with necessary training in the aspects such as financial matters and marketing for running the business efficiently. The recommendations made in the paper seeks to address these lacunae through a government sponsored and structured institutional backing for SMEs to support them financially. With regard to training, the associations for SMEs need to be formed, if it not already existing in a particular case, and strengthened to render training facilities to the promoters or employees of the SMEs in various areas which include financial management, marketing, quality control methods and R&D relating to various businesses Introduction The niche areas in various businesses offer immense scope in the context of SMEs for specialization, growth and development with limited competition because the projects with limited or localized demand and limited investment outlay are not suitable for the growth of big corporate companies. This is one of the reasons why corporate companies concentrate on retail, telecom, food processing, housing and infrastructure where the volume could be scaled up and the growth prospects for the big companies are compatible with the level of investment. Therefore, in the absence of acute competition and the need for only limited investment outlay and labor requirement, superior level of personalized service and specialist experience in the chosen field have been the prime drivers of the growth of the SMEs over the period of time. Hussain, Milman & Matlay (2006 p. 586) states “In recent years, policy makers in the UK have attempted to address the apparent market failure to supply adequate and specific finance for SMEs”. The efforts should be based on continuous review and radical restructuring of the domestic economy in the backdrop of liberalization and globalization. Background The small and medium enterprises play a significant role in the economic development of a country. World Business Council for Sustainable Development states that the SMEs can play a much bigger role in developing national economies, alleviating poverty, participating in the global economy and partnering with larger corporations. For an economic growth to be sustainable in the long run, the growth must be balanced encompassing all the sections of the society. There are certain misgivings about the growth and development of SMEs promoted and run by ethnic minority people. Financing in respect of SMEs depends on various factors, but aligning the financial needs of the ethnic minority SMEs with the mainstream national growth and development is very important for a peaceful prosperity. Objectives The objective is to identify the causes for the disparity in financing to small and medium projects promoted by the ethnic minority people, analyze the causes leading to this problem and recommend solutions to overcome these problems. Limitations The eligibility criteria fixed for the purpose of financing vary from case to case. Apart from the qualification and experience, the commercial viability or feasibility of the project is very important. The cultural background and the financial status of the people belonging to various minority ethnic groups would be different from each other. Therefore, prescribing uniform solution to deal with the issue on a national level would be hazardous considering the sensitiveness involved. Hence, the recommendations given are very broad in nature with reference to the policy measures. Literature review According to Tonge (2001), small firms constitute 95 % of enterprises, but there is no uniformly satisfactory definition of a small firm despite the importance given to SMEs by government as a source of economic development. Ethnic minority views the society with suspicion due to so many reasons. Proportional representation for an ethnic minority in a society, though not denied is highly difficult, even in a democratic society. The population though sizable may be thinly spread over the entire country making it impossible to assert itself politically. A study by Gines & Pedro (2010, p. 465) shows that the existence of trust between a firm and bank improves access to financing and reduces the borrowing costs, whereas it increases the likelihood that guarantees will have to be provided. Providing bank finance to SMEs is the cornerstone for the growth and development of SMEs as well as the economic growth of a nation. Mercieca, Schaeck & Wolfe (2009, p. 150) states “Removing barriers and obstacles that hamper setting up multiple bank relationships imposed on banks will enable SMEs to develop and mature by making use of more sophisticated financial services, thus ultimately promoting economic growth”. The financing by the banks especially in the case of start-up companies depends on so many factors like feasibility of the project, marketability of the products, arrangements with the suppliers of machinery, construction of buildings, marketing tie-ups, availability of raw materials, the acceptability of the products by the consumers, arrangement for distribution and so on which are common to all promoters. However, the survey conducted by David & Jonathan (2010, p. 245) confirmed that - and this finding was statistically significant - ethnic minority businesses, particularly black owner-managers, had the greatest problem raising finance and hence relied upon "bootstrapping" as a financing strategy. The financial search behavior of SMEs in different regions varies. Berggren & Silver (2010, p. 230) states “In the metropolitan areas, firms are more active in searching for new owners, especially professional investors. In smaller municipalities, banks dominate as the most important financier”. The word ‘entrepreneurship’ is loosely used to cover all types of enterprises including minor freelance activities by the people to earn their living, like setting up of small shops or rendering various services to community on a smaller scale. According to Graham (2003, 178) academics and policy makers often regard self-employment as a major career change, and it involves barriers to entry and risk taking rather than simple forms of enterprise. A study by Watson, Newby & Mahuka (2009, p. 53) also failed to find any evidence of actual discrimination by financial institutions against female SME owners in terms of either: the average time taken to approve a loan; the length (term) of the loan; or the interest rate charged. However, there is paucity of literature in the case of ethnic minority women entrepreneurs. Competitive advantage in SME is very important for its survival. Innovation, novelty, new uses, change and style are some of the important features that the SMEs try to bank on for their growth and development. Javed, Harry & Jonathan (2008, p. 737) found in their survey on ethnic minority SMEs that owner/managers in small and medium-sized businesses have relatively higher educational achievements and a better appreciation of the role of financial education, which is bound to lend an edge in their operations. Opportunity recognition process is an essential attribute to entrepreneurship, that is “opportunities to create future goods and services are discovered, evaluated and exploited” (Shane & Venkataraman, 2000, p. 218) Audretsch (2004, p. 167 & 188) argues that the role of entrepreneurship in society has changed drastically over the last half century. Whilst alarm was expressed that small business needed to be preserved and protected for social and political reasons, few made the case on the grounds of economic efficiency” and concludes that an important new direction for public policy to promote innovation and economic growth is necessary. Far reaching structural changes in the banking system is necessary for the healthy growth of SMEs and their sustainability. According to the Governor of Bank of England (1999, p. 209) the recent underperformance of smaller quoted companies may also reflect the growing concentration of the fund management industry on larger and more liquid stocks and the recent KPMG report supports this view. Due to lack of financial support, the SMEs resort to short term finance to tide over the capital requirements at a relatively higher cost. Huchinson & Hall & Michaelas (1998, p. 2) states “Various theories have been suggested to explain the different capital structures observed for small enterprises. Weston and Brigham (1981) used a life-cycle analogy to explain the extensive use of short-term debt by small enterprises”. Lack of comprehensive policy in the case SMEs makes the progress of this sector very difficult. The Bolton Committee of Inquiry on Small Firms observed that “The most telling criticism of Government in this field is not that its policy towards small business is misconceived or hostile, but that it has no policy ...” (Bolton, 1971, p. 95). Apart from giving favored status to the SMEs, statutory support to provide facilities by way of training, tax exemptions or concessions and marketing support is necessary for the growth of SMEs and its sustainability. Tonge (2001) observed that some sectors are tax-exempt in the case of firms registering for VAT. Concessions to SMEs under special circumstances could be considered to make their products competitive based on several factors such as environment friendly production process, job creation and ethnic minority status. The integration of the enterprises run by ethnic minority with the national mainstream starts from their interaction at the community level. According to Jenkins (2000, p. 96), while there are barriers existing in the interaction between SMEs and communities, this interaction add to the sustainability of those communities in some form. The opportunities provided to SMEs in the niche areas in software technology, architectural, industrial and fashion designing, information technology enabled services, animation, game development, graphics and business process outsourcing, apart from their role in the labor oriented conventional services in respect of billing, collections, statements for payroll and taxation, data management and accounting. In most of the cases, it is the entrepreneurship rather than capital which is very important factor for success. However, financial assistance to these entrepreneurs through proper planning by the government will pave way for tremendous growth in domestic and exports business. Lee-Ross & Lashley (2009, p. 228) observes that Burns’ (2001) perspective of behaviors common to both leaders and entrepreneurs is not dissimilar which include Stamina, commitment and dedication, opportunism, ability to bounce back, motivation to excel and tolerance of risk, ambiguity and uncertainty. Therefore, an ethnic minority entrepreneur with these qualities will overcome the obstacles in achieving the objectives effectively. Business Process Outsourcing (BPO) could be considered as one of the major advantages in the process of liberalization and globalization which has opened up several opportunities for the SMEs world over. For instance, a look at website of the iprojects (2011), an end-to-end Business Process Outsourcing (BPO) solutions provider reveals that the scope for SMEs in the medical field covers a wide range of activities which includes Enrollment, Premium Billing & Collection, Disease Management, Analytical functions, Claims, Compliance, Customer care and so on, whereas these services naturally falls outside the purview of large business and logically falls into the realm of SMEs, because a big hospital can outsource various activities to various SMEs based on the qualification, experience and track record of the promoters. According to Cesar Tolentino, the executive director of Game Developers Association of the Philippines (GDAP), “the small and medium enterprises (SMEs) that comprise 99.6 percent of all registered businesses and employ 70 percent of the workforce can fuel more growth in the thriving business process outsourcing (BPO) industry in the country”. (Cacho, K. O., 2010). In fact Methodology Secondary sources of information have been used for analysis. The secondary sources such as published books, journals and internet articles cover wide range of issues connected to SMEs. The analysis is made with reference to SMEs in general to form a basis for further analysis of the SME experience with particular reference to ethnic minority. This comparative analysis would reveal the unique features related to SME ethnic minority finance, the opportunities available and the challenges in the business, and the recommendations are based on these findings. Findings SMEs are started mostly by the young persons with innovative ideas, business acumen with or without experience in an area familiar to them based on the qualification, experience or knowledge acquired on the business. The entrepreneurs want to contribute to the development of the economy by providing employment to the people in the community, to be independent or achieve big in their life. The strength of the SMEs in the economy lies in job creation. In the case of ethnic minorities, the perception about the lack of support to the SMEs promoted by them cannot be substantiated with reasonable arguments. Though they are lagging behind in the SME perspective, the causes are extraneous to the administrative or regulatory support where discrimination is very limited though it could not be ruled out in extreme cases, especially in the case of start-up companies due to some specific shortcomings. Though it is true that the distinctions between the various ethnic groups make it difficult to construct an over-arching set of policies with regard to SME ethnic minority finance, a comprehensive survey would be useful in sorting out the issues and finalize the strategies to overcome the obstacles. By and large, the reasons for the perceived lack of financial support to the various ethnic minority groups could be mainly grounded on lack of experience, references, collateral security and surety. Though it is understandable from a banker’s point of view, the minority ethnic group needs support from the society or government to prove their worth to the nation. It is the responsibility of the government to ensure that the support needed is provided in the backdrop of globalization and the far reaching developments in technology and telecommunications, Discussion The most important problem faced by the ethnic minority entrepreneurs is lack of financial support. The reasons for the lack of financial support could be attributed to lack of references, collateral security and surety in the case of ethnic minority because, the social background of the entrepreneurs makes it difficult for providing these basic requirements of bank finance. Establishing proper mechanism to ensure that these entrepreneurs are given the support needed means, in the first place, relaxation of eligibility criteria for the ethnic minority people. Though strict proportional representation to the ethnic minority entrepreneurs in the number of new projects during any particular period in a particular state or region may not be possible on account of various eligibility factors, the government and the banks should aim for fair representation to these people to ensure equitable treatment, considering the need for bringing them to the national mainstream for a balanced growth in the society and economy. The local customers and suppliers of the firm are rather partners in business to the SMEs and the ethnic minority promoted companies may find it very challenging to strike a cordial relationship in an environment where the customers and suppliers prefer to lend support for the development of their own people. In the internet age, the dependence on local community for demand has been considerably reduced, and the innovative techniques adopted by the entrepreneurs enable them to expand their reach across the globe. However, the level of interaction with the local community is very important for the SMEs, especially the ethnic minority SMEs for the integration of their business with the community where they do business. Integrating the SMEs, and especially the ones promoted by ethnic minority groups into the national economy for a mutual benefit can be addressed properly only through comprehensive policies of the government, supported by radical legislations to lend credibility to the policies. Establishing a framework for financing to the SMEs at the national level and providing support services such as technology and training to the entrepreneurs in financial management, management controls and marketing will make the SME economy very stronger. Phenomenal growth in employment creation is a distinct possibility with a strong SME sector at the national level. These initiatives need to be strengthened by appropriate exemptions and concessions in taxation to create a level playing field for the SMEs to compete with the large scale companies locally and internationally. The initiatives taken already by the government need to be revisited and reviewed in line with the track record of the SMEs in general and the ethnic minority SMEs in particular for restructuring of the policies in the light of the experience. Bing and Mingxiao (2006, p. 495) states “To promote the use of the existing financial system, the United States has developed the Law for the Small Enterprises, and established the Small Business administration in accordance with the law”. The government has set down control policies with regard to institutional financing to SMEs which covers SME lending programs, loan guarantees, assigning the financial institutions to loan to SMEs, performance guarantees, equity investment through Small Business Investment Corporation and creating an “angel capital” to attract private capital to SMEs. The progress of ethnic minorities in a society is beset with so many problems both socially, politically and economically. But, innovative thinking and ideas of the people are accepted on merit basis, rather than based on any other considerations, if they are projected with the underlining benefits to the mankind in terms of convenience, cost reduction, utility, tastes and fashions. The growth in the spheres of information technology, telecommunications, media and social networks in the recent years have given rise to tremendous opportunities cutting across the borders of the nations where the ethnic factor is of no concern. However, the financial assistance provided at the start up stage to the deserving entrepreneurs is very crucial especially in the case of ethnic minority SME entrepreneurs. Conclusions The conclusions given in respect entrepreneurial finance in respect of SMEs are broader in nature based on the analysis and discussion. Framework for financial assistance Framework for financial assistance to the start-up companies and the existing companies by establishing specialized financial institutions for financing and credit guarantees to SMEs and financial departments to evolve policies and coordinate with the various agencies and the governments is very important. The government can take initiatives for developing venture capital system exclusively for the promotion of SMEs by providing financial, administrative and infrastructural support for this purpose. Institutionalized assistance for capital formation Access to capital by the SMEs through stock markets needs to be given serious consideration, and the government needs to take initiatives and provide infrastructural facilities, financial, management and administrative support for the establishment of capital market for SMEs with an appropriate lower level of capital requirements for listing purposes. Capital formation in this route would be easier, effective and less costly to the SMEs. Providing support services and training Providing support services that include technology and training to the entrepreneurs in financial management, management controls and marketing is very crucial for development. According to Le-Ross & Lashley (2009, p. 240), if a strong culture is to be established and sustained successfully, training and socialization procedures need to be focused, and the government needs to make arrangements for providing training facilities to SMEs through various institutions . Target for disbursement of finance to SMEs Establishing targets in SME finance would ensure that the growth of SMEs is taking place in line with the policy decisions of the government with regard to promotion of SMEs. For instance, Bing & Mingxiao states that in July of 1982, seven Taiwan-owned banks set up a "Small Provincial Venture Counseling Center" for financing fund 100 million worth, to those SMEs which have difficulties in financing but potential development, as potential targets with specific guidance for their comprehensive counseling and assistance in financing. Tax concessions to SMEs Tax concessions or exemptions to support SMEs are prevalent worldwide in view of the role played by this sector in the economic development. OECD (p. 1) calls for lowering the tax compliance costs imposed on small and medium-size enterprises (SMEs) in view of its possible effects on the competitive position of firms and firm behavior, because cost considerations may factor centrally into a number of decisions, for example, whether to become self-employed and whether to operate in the formal economy. Recommendations Recommendations are based on the conclusions and with particular reference to ethnic minority SMEs. Framework for financial assistance: Specialized agency, venture capital and a separate capital market may be established for the purpose of financing to SMEs with suitable reservation to ethnic minority SMEs wherever possible and practicable to lend focus to the efforts. Support services and Training: Centralized agency may be established for coordinating the activities of providing training and facilities to the SMEs by various agencies with exemption or concession to charges or fees payable for such services by ethnic minority SMEs. Target for disbursement: Target for disbursement of loans to ethnic minority SMEs may be specified to the banks with guarantees for loans given by the government to overcome the financing problems faced by the ethnic minority SMEs effectively. Tax concessions: Tax concessions or exemptions required to make the SMEs competitive at par with larger organizations with an objective of creating a level playing field, may be worked out by the government for implementation. Though the distinctions between the various ethnic groups make it difficult to construct an over-arching set of policies with regard to SME ethnic minority finance, concerted efforts on the part of the government is needed for a comprehensive survey to fine tune the recommendations outlined above in line with the peculiar circumstance that might be obtained in different cases, for a meaningful solution to the issues discussed. References Audretsch, D. B. (2004), Audretsch, D. B. (2004) SUSTAINING INNOVATION AND GROWTH: PUBLIC POLICY SUPPORT FOR ENTREPRENEURSHIP, Industry and Innovation, Sep 2004, 11(3), pp.167-191. Bank of England, Developments in Small Business Finance, Quarterly Bulletin; May 1999, 39(2). Berggren, B. & Silver, L., (2010), Financing entrepreneurship in different regions, Journal of Small Business and Enterprise Development, Volume 17, Issue 2, pp. 230-246. Bing, W. & Mingxiao, C. (2006), International Comparison Research for SMEs Financing Model, 1school of economics, Shenyang University of Technology, P.R.China, http://www.seiofbluemountain.com/upload/product/200911/2006zxqyhy05a18.pdf Bolton, J. E. (1971) Report of the Committee of Inquiry on Small Firms, Cmnd 4811, HMSO, London.  Cacho, K. O., (2010), ‘Niche services’ benefitting SMEs, Sun Star Publishing, Inc., http://www.sunstar.com.ph/cebu/niche-services-benefitting-smes. David, I. & Jonathan, S. (2010), Barriers faced by SMEs in raising bank finance, International Journal of Entrepreneurial Behaviour & Research, http://search.proquest.com.ezproxy.fiu.edu/docview/212114051/abstract/12EE2D92ED962261FA9/5?accountid=10901 Gines, H. & Pedro, M. (2010), Relationship lending and SME financing in the continental European bank-based system, Small Business Economics, Springer Science & Business Media, Volume 34, Issue 4, pp. 465-492. Graham, B. 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(2009), Entrepreneurship & Small Business Management in the Hospitality Industry, Butterworth-Heinemann, Elsevier Ltd. Mercieca, S., Schaeck, K. & Wolfe, S. (2009), Bank Market Structure, Competition, and SME Financing Relationships in European Regions, Journal of Financial Services Research, Volume 36, Issue 2-3, pp. 137-155. OECD, SME Tax Compliance and Simplification, Background note prepared by the OECD Centre for Tax Policy and Administration for a „Roundtable Discussion? at the 1st Meeting of the Working Group on Taxation of the SEE Investment Committee, http://www.oecd.org/dataoecd/22/24/41873897.pdf Shane, S. & Venkataraman, S. (2000), The Promise of Entrepreneurship as a Field of Research, Academy of Management Review, Volume 25, pp. 217-226. Tonge, J. (2001), A Review of Small Business Literature Part 1: Defining The Small Business, WPS025, Centre for Corporate and Public Affairs Manchester Metropolitan University Business School, http://www.ribm.mmu.ac.uk/wps/papers/01-18.pdf Watson, J., Newby, R. & Mahuka, A. (2009) Gender & the SME “finance gap”, International Journal of Gender and Entrepreneurship, Volume 1, Issue 1, pp. 42-56. World Business Council for Sustainable Development, Promoting Small and Medium Enterprises for Sustainable Development, http://www.wbcsd.org/DocRoot/pZgjPEvxdGu6hk9noQUM/PromotingSMEs_latest.pdf Read More