Small Medium Enterprise Access to Bank Finance in West Sussex - Essay Example

ACCESS TO BANK FINANCE xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Lecturer xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Date Small Medium Enterprise (SME) Access to Bank Finance in West Sussex  How Lack of Bank Finance Affects the Growth of SME in West Sussex The standard measures of SME growth are increase in the number of workers, increase in the volume of sales and increase in the net assets of the business (SME). These variables are moderately easy to determine among the SMEs in West Sussex (Beck & Demirguc-Kunt 2006). This is because the variables are easily identifiable and information about them readily available. In addition, the SME owners remember them and they are not subject to macroeconomic instability such as changes in inflation and changes in the interest rate. The macroeconomic instabilities do not affect their value as well. It is very evident that lack of bank finances affects the growth of SME in West Sussex. It also affects their capabilities of realizing their full potential. Banks provide capital to the SMEs. The SMEs use this capital to make investments and make capital expenditure. They also use the finances to fund their everyday activities and operations of the business. As such, lack of bank finances hinders their maturity, as they are rendered incapable of making investments for generating income and therefore stagnate. Lack of capital resources is a significant constraint on the growth and enlargement of small and medium enterprises. Lack of bank finances makes the SMEs unable to meet a variety of investment and operational needs. This is a serious element for expansion of the SMEs. This is because most SMEs do not have access to other forms of financing because they cannot raise capital by way of selling bonds, stock options, debentures, ordinary and preference stocks, equity or retained earnings (Beck et al., 2005). They are restricted to funding from banks in the form of bank loans. Lack of the bank finances therefore does not only hinder their growth but also their ability to raise working capital for daily financial requirement of the business. Banks structure themselves and their products to serve the large and well-established companies and therefore neglect the SMEs. Banks rush to serve large firms in order to get high income and because the firms have a lower risk of the loan default as compared to SMEs. According to Carpenter & Petersen (2002), the SMEs do not make enough income to sustain the need of development and income generating investments. In addition, the investments take time before they start generating revenue and thereby limiting SME growth. As such, SMEs needs finances from the banks to make good viable investments. The small and medium size enterprises also need funds to purchase equipments and make other capital expenditures for expansion of the business. However, they do not generate enough income to support the expansion and therefore they require and need bank funds. Lack of funds from the banks means that they do not make investments as well as they do not make capital expenditures and therefore no growth (Berger & Udell 2006). Some SMEs do not generate enough income to keep them afloat in the market. This is a chief reason that SMEs in West Sussex have not been registering a growth in the past with some of them opting out since they cannot sustain themselves in the market. Why SME in West Sussex Struggle to Gain Loans from Banks The charge on funds is one of the constraining factors that make small and medium enterprises (SMEs) in West Sussex struggle to gain loans from banks as Claessens & Laeven (2004) asserts. This is the most constraining feature that owners and administrators of the SMEs indicate. In actual sense, above 35% of the SME administrators indicate the cost of the loans as the major constraining factor for the growth of SMEs in a business environment. Considering that, Britain is a developed and a first world economy, this factor should not be occurring as the major constrict in hindering the growth of small and medium enterprises in West Sussex. Interestingly, the owners indicate the cost of finance as one of the foremost factors for the expansion of the small and medium enterprises. They indicate that their businesses need an injection of funds to be capable to expand, buy more stock and have enough working capital. As such, lack of the loans means that the SMEs do not have funds for expansion, purchase of stocks and adequate working capital. This does not only hinder the growth of SMEs but also the economic growth of West Sussex and therefore lack of employment for many people. Banks in West Sussex offer loans at very high costs that the SMEs are not able to finance. This makes the SMEs not to have access to loans from banks. The SMEs do not generate large profits and therefore they cannot sustain an expensive loan from the banks. Many of the SMEs in West Sussex are sole proprietors and family businesses while a group of people owns a few of the SMEs (Hall et al., 2000). Another reason why SMEs in West Sussex struggle to gain access to bank loans is lack of collateral for the loans as Simpson & Docherty (2004) underpins. SMEs in West Sussex do not have huge assets that banks demand to use as collateral for the loan. Better protection of business assets and properties are very important in getting external financing such as bank loan. Unlike large firms and businesses with many assets of high value, SMEs do not have such assets and therefore they are unable to get access to loans from banks. The lack of collateral for a loan makes the banks to raise the cost of the loans in such a way that the small and medium enterprises are unable to finance the loan. They also put in strict measures for the SMEs thereby hindering them from using the bank loans. Another reason why SMEs in West Sussex struggle to gain loans from banks is fear and risk of losing their business. They consider that their businesses generate much income irregularly. As such, they fear that they may be unable to pay and refinance the bank loan and therefore the bank may take and sell their business to repay the loan. They consider bank loans too risky for their business and therefore they opt not to go for the bank loan (Claessens & Laeven 2004). Most of the SMEs do not understand the bureaucratic procedures by banks and therefore are afraid of going for bank loans. They usually get in to a financial twist rather than get a financial loan from the banks. As such, they can neither give up for the bank loans nor put right what the banks require for financing as (Hall et al., 2000) underpins. The SMEs considers this very tricky and risky and therefore struggle to gain access to bank loans. Another one is macroeconomic instability. The interest rates on the bank loan is market regulated. The fluctuations of the interest rates makes loans to be expensive because at times the interest rate is lower while at times the rate is very high. The fluctuations of the interest rates affect the bank loan directly by increasing the cost of the bank loan. Another macroeconomic factor is the inflation rate. The inflation rate makes the bank loan to be expensive and costly such that SMEs are unable to gain access. High rates of inflation raise the cost of the loan because the banks add in the effects of the inflation rate to their financial products to prevent making losses. High interest rates and inflation rates lower the economic activities of businesses. SMEs record reduction in business because consumers are not willing to spend. Consumers hold their finances and therefore SMEs make a little income. This makes them consider that they cannot be able to finance bank loans. The instability of microeconomic factors makes the SMEs struggle to access bank loans (Achanga et al., 2006). Banks are restrictive in advancing loans to small and medium enterprises. One of the factors that make banks to be restrictive is low equity base of SMEs. Another reason is that SMEs lack visibility and vision in their cash flow that can sustain loan finance. Banks collateralize loans and often they face delays in collecting their receivables therefore restricting advancing loans to SMEs. The SMEs lack business and financial information; this is information asymmetry and makes it difficult for loan Finance to thrive (Bartlet & Bukvič 2001). Risk averseness is also a major factor by the bank because it is always at the public eye. These restrictive measures by banks make SMEs to struggle in gaining access to bank loans. SMEs in West Sussex suffer from some constrains that lower their resilience to risk (Harindranath et al., 2008). This prevents the SMEs from growing as well as attaining economies of scale. They do not have a well-developed human resource development for steering the business forward. They have lower access to the market as compared to big firms and have lower access to modern information and technology. These factors are very important in driving the business to greater heights in terms of business and growth. They are a necessity for the SMEs but unfortunately, they do not have them. This makes them to struggle to gain bank loans. There are high rates of defaults in repayment and financing of loans advanced by banks in West Sussex. This default relates to tight cash flow situations of the small and medium enterprises usually because of problems and difficulties in managing accounts receivables by the SMEs (Hussain et al., 2006). Furthermore, SMEs struggle to gain access to bank loans because they do not have business plans. This is one requirement for banks to advance loans to the SMEs. Most of the SMEs lack the business plans because they are not formal. They are also not able to follow the business plan as they consider it unrealistic and therefore become hard for them to gain access to the bank loans. To gain access, the SMEs must produce a viable and realistic business plan that they are ready to implement in the business. This hinders the banks from advancing loans to the SMEs in West Sussex.  Recommendation for SMEs On How to Gain Access on Bank Finance Successfully A level playing ground for SMEs is very significant in accessing bank finance. SMEs need institutional and financial development for them to get access to bank financing. One of the reasons why banks in West Sussex do not advance loans to SMEs is lack of financial and institutional organization and development. They lack an effective and clear system for managing their finances and their business as a whole. Banks demand for a clear system of how the SME manage and operate the business finances and the whole business as well. Most of the SMEs are informal with unclear business structure. This makes it hard for the banks to give the SMEs loans due to lack of organisation. As such, SMEs should ensure that they have well organization in terms of institutional and financial development and organization. They should have a clear system of managing business finances (Robson & Bennett 2000). On the side of banks, they should have demand side measures for encouraging and educating for healthy use and access of bank loans by the small and medium enterprises (Wynarczyk & Watson 2005). Banks should therefore prioritize educating the SMEs how to manage the business and manage business finances. This will encourage the administrators and owners of the SMEs to take a step of taking the bank loan. SMEs avoid taking bank loans because they do not know how to manage their business professionally and categorically. As such, education will encourage the SMEs to take the ban loan. Another recommendation on how to gain access on bank finance successfully is for banks to establish factoring services. Most SMEs have difficulties in maintaining a good cash flow that can meet operational and financial obligation in servicing the bank loan as agreed by the SME and the bank (Reid & Harris 2004). Factoring will help SMEs to manage account receivables as it has several benefits. Another recommendation is sharing credit information to facilitate the development of information capital. This with reduce risk premiums that are associated with information asymmetry and therefore help SMEs to gain access to bank loans successfully. Information capital will also change collateral technology and the banks will not demand for collateral in order to advance loans to SMEs. Banks will build information record of accomplishment that SMEs can use in accessing credit (Hashi 2001). Banks should accept a reasonable risk in order to advance loans to the SMEs. This is because; SMEs high risks make banks to restrict and withhold giving them loans. This will encourage the SMEs to apply for the bank loans and therefore grow their businesses (Oakey 2003). SMEs should use the opportunity to go for bank loans, make investment, and improve their operations. 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