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Corparate finance - Essay Example

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Small and Medium Sized Enterprises (SMEs) are considered a critical component of the business fraternity and they contribute significantly to the success of the economies of most countries across the world. SMEs have also in the recent past been seen to increase their…
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Download file to see previous pages One of the most significant challenges that most SMEs have faced regardless of their country of origin is the problem of access to financing for their operations as well as for their growth and development. Studies reveal that most SMES are characterized by very tight budgets and liquidity constraints and are therefore constantly in search of new sources of financing (Jiang, Li & Lin, 2014).
According to Abereijo and Fayomi (2005), the generation of entrepreneurial ideas is not normally a difficult challenge for most people, however, the generation or availability of funds to translate the idea into a running business is another. A lot of ideas have that were considered excellent and innovative have been known to die simply due to the fact that the entrepreneurs who came up with them lacked funds to translate them to businesses and also due to the fact that financial institutions could not agree to invest in them. It is therefore important to note that finance from whichever source, is critical for the growth and development of SMEs and in order to maximize the profits realized from the business. Given the nature of SMEs as shown above, there is therefore critical need for the financing of their activities mostly from external sources of finance (Briozzo, 2012).
It has been suggested that on a general scope, SMEs normally have four main financing requirements: these are the initial investments on infrastructure, the operational costs which are sometimes required in lump sum amount, growth and expansion, and finally, unexpected opportunities that arise during the course of operations requiring a quick access to finances. It is however noted that despite the glaring need for finances, most SMEs often choose to use internal sources of finances for example from the entrepreneurs own funds or from the cash flows from operations instead of choosing external sources of finance. This choice is normally determined by the relative ...Download file to see next pagesRead More
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