Corporate Finance and Small Business Enterprises - Coursework Example

INSTUTION: A business is defined as economic investments that are intended to bring profit to the owner through provision of goods andservices or both to consumers at a fee (Sullivan & Sheffrin, 2003). The categorization of business as either small or medium depends on the amount of revenue generated to support the government. It also depends on the job opportunities it can provide for the citizens and also. Susman (2007) also explains that the categorization of SMEs, also depends on the amount of revenue, that they are able to generate. This categorization also depends on the business what is considered legal to that country and also on the industrial sector in which such businesses operate. Most small and medium business enterprises are individually owned also known as sole proprietorships, partnerships and privately owned corporations which are aimed at ensuring that the investors obtain a profitable return of their input (Healeas, 2004.).Small business owners rarely draw a boundary between their personal and business interests as seen in their behavior. This is because they are managers of their own business. In the modern world, many young entrepreneurs are faced with several challenges (Susman, 2007). Among these, financial constraints are seen as the most pressing needs by many if not all entrepreneurs. Enterprise funding has been used as a mechanism to financeenterprisesas a means of enhancing economic growth in various parts of the world. Organizations at all levels have joined concerted efforts to fund small and medium enterprises which were negatively affected by the global financial crisis (Arora & Harper, 2005). Efforts by the most trusted international organizations for accounting including the Association for Certified Accountants (ACCA), and Certified General accountants (CGA-Canada) in collaboration with other units of Economic interests have made concerted efforts to reveal the impact of financial constraints and the impact of government efforts towards interventions. Sources of finance for business enterprises include every strategy deployed by the enterprise to secure financial resources for the growth of the business. Other sources involve monetary and other resources used by the entrepreneur at the start of the business as the starting capital. Loans also come in handy in the financing of business enterprises this is because the various types of loans an investor can obtain cab be invested and re-payed overtime, and at an interest (Susman, 2007). Many banks and other financial and micro finance institutions offer these loans at a competitive rate. This provides the entrepreneur with a wide range of alternatives to select from.Loans can be in many forms such as credit cards, bank overdrafts, bank loans, mortgages, enterprise finance guarantee scheme. Bank overdrafts are instances when the bank allows an individual, a cooperation, or company from its account with the bank and the initial balance goes below zero, hence, an account is said to be over drawn (Susman, 2007). There are scenarios where the agreed amount of money to be overdrawn is usually agreed upon by the bank and the account holder, hence the amount overdrawn is usually considered to be within the overdraft limit. However, if the amount overdrawn exceeds the amount in the agreed terms, the higher terms interest rates apply and are charged to the individual, cooperation or company (Healeas, 2004). There are various reasons to why businesses take bank overdrafts, this includes, when they find themselves short of liquid cash. With this they ask for a bank overdraft and recover the money as well as interest rates with their next deposit. It may also occur when an individual or organization does not put full accurate observation of the bank transactions that or details of their bank account, and end up spending a lot in negligence (Datta & Sriram, 2012). Bank loans are loans given to businesses, companies, or individuals by banks. They are usually subject to high interest rates. Banks compete with each other in the giving of loans and the only way they can do this is by reducing the interest rates they charge on the loans (Arora & Harper, 2005). Loans have been very essential in the as sources of funds or finances for businesses. Mortgages are types of loans given by the bank, they help individuals, cooperation’s and companies acquire physical assets in terms of building infrastructure (Arora & Harper, 2005). The difference between the amount owed and the value of interest and assets is called equity. The equity of a business venture can be a rich source of revenue for the business. Arora & Harper (2005) explains that, is the real value of the business organization, and this is after the removal of its debts. Equity can be used as a guarantor to the business to ensure its continual operation (Anon, 2008). Grants have also been used over the years to ensure that small and medium business enterprises do not fail. A grant is any form of financial assistance which does not require to be paid back.Normally, a grant is considered a gift given to the organization as a means of salvaging it from its hitherto economic status (Anon, 2008). Another source of funding for small and medium business enterprises is asset-backed finance. This is whereby the entrepreneur uses his or her assets as collateral to obtain financial assistance for investment and make payments at a later date (Datta & Sriram, 2012). Business relationship funding involves the partnering with other business enterprises for a common goal. It involves pulling together of resources be it financial, material and human resource (Mishkin, 2008). The two or more business enterprisesagree to contribute at a percentage and divide the profit at a percentage as well.For example a cloth business enterprise may join partnership with the sales and distribution industries such as uniform distributors in which the initial provides the good, and the latter the sales service and the profit is split at a consented percentage (Arora & Harper, 2005). Debt itself is a source of finance for any business enterprise (Anon, 2008). This is because, by accumulating debts, the company can reinvest the money it would have otherwise used to pay off the liability. For example, if a company owes $200, postponement of payment would mean that will re-invest and create profit out of it before the debt is paid (Datta & Sriram, 2012). Profit re-investments are also another key source of funds for business. The growth of business is dependent upon the money that is pumped back into the business. The more the profit pumped back into the business, the greater the economic growth and expansion of the business enterprise. Individual savings can also provide a source of financial input (Healeas, 2004). Many entrepreneurs use their savings from their jobs and business to boost the growth of their business. An investor would set targets of savings with an intention of using such funds to develop the business (Mishkin, 2008). Contributions from friends, family members, based on trust and sometimes good will, also play a fundamental role in funding the business. Friends and family can cheap in to show their support for an individual’s business (Cooper, 2008). Advance payments from the customer may come in handy especially in the times of financial instability. Customers can place orders with advance payments and the money they put as deposit may be a rich source of finds for the, Delay of payments to employees may also salvage a company from its financial crisis (Buyske, 2007). This is because by delaying the employees,we are able to re-invest the money and make profits out of it and by so doing, we rescue the business from its financial crisis. Premises sharing also reduce the cost of operation for the two business enterprises by cutting on cost of premises unlike if the two premises operated from separate premises (Buyske, 2007). These financial resources that would have otherwise been used to pay for a full resource is halved and the remaining half forms part of the business capital (Anon, 2008). Labor obtained from employment of relatives who offer relatively cheap labor at times even for free, such as in family canteens, helps to reduce the labor cost and at the same time secure the labor force (Mishkin, 2008). Savings from this kind of management can be strategically used to provide funds needed for the smooth running of the business. Global financial crisis is considered the most devastating economic situation after the 1930’s great depression (Mishkin, (2008)). It was characterized by the threat of permanent closure the world’s renownedfinancial institutions. This menace was prevented by the government actions to provide financial support to these institutions. However, this did not preventa global drop in the stock markets. This crisis led to the collapse of major businesses, consumer wealth reduction and global recession (Healeas, 2004). It also led to debt crisis in Europe. All these events took place from 2007 when the global financial crisis began through to 2012 when the global recession was felt across the planet (Arora & Harper, 2005). This crisis led to the decline in international trade, investment rates and a critical loss in social relations. Credit crunch is a result of the global economic crisis and led to the general decline in the availability of credit facilities aside from that, the conditional requirements for one to qualify for credit were tightened due to the recession in the global economic sphere (Cooper, (2008).). This period also saw the increase in interest rates of credit offered. This had an effect in limiting the number of people who could take credit, or loans. Simkovic (2009) in their analysis of the global economic crisis, they did explain that the effect of this crisis was felt to the grassroots level (Simkovic, 2009). Even as these events unfold research is still underway in a bid to mitigate the impact of this crisis. It is argued that the stability of a state’s currency system, the stability of the credit institutions which serve mass populations within the country, their ability to compete favorably dependency on international monetary institutions coupled with their savings and ability to repay debts (Datta & Sriram, 2012). The fear of many about the growth in the global crisis scale was reaffirmed in 2008 during the G20 summit in Washington. The effect is equally if not slightly greater in developing countries when compared to the developed world (Healeas, 2004). Therefore massive negative effects have been experienced by in small business ventures across the globe (Manos, Gueyie & Yaron, 2013). Diverse impacts of the global economic crisis have been clearly delineated by various survey researches conducted in U.S. Contrasting notions of effects of the economic crisis are brought to the fore by survey researches such as the commercial and industrial credit to small businesses (Mishkin, 2008). This showed that a net 85% of banking institutions had tightened their qualification requirements for the loans on large and medium businesses (Datta & Sriram, 2012). Most banks according to their reports had increased their interest spread rates and agreed that all applicants should meet the collateral requirements and sign a loan form of contract (Cooper, 2008). The banking sector implied that the conditional requirement for access to credit by small enterprises has been made more stringent. In October 2008, all the banks had about 75% of banks surveyed in the U.S. confirmed that indeed the requirements had been tightened (Datta & Sriram, 2012). Another net 85% of banks recorded that over the past three months, they had made stringent qualifications for loans (Healeas, 2004). Another contradiction of the above is realized through a study conducted by Manos, Gueyie & Yaron (2013). Under this study, these authors were able to find out that there were slight changes in the rates of interest. This means that the African countries are not are still favored by the C&I loan conditions (Manos, Gueyie & Yaron, 2013). This observation was a study accumulated for two years since 2006. The C&I loans data show that number of small business enterprises accessing loans has not reduced (Mishkin, 2008). This comes at a time when new loans and loan conditions are made stricter over time. The dollar volumes in banks both small and big have grown and expanded greatly over the first four months. This increase was moderately increased between May and August and rapidly increase was noted in September the same year (Anon, 2008). Increased demand was dealt with through the introduction of bank loans by other forms of lending such as microfinance loans. In a study carried out by Manos, Gueyie & Yaron (2013), these authors were able to find out that there is a decrease in the accessibility of credit, by SMEs. The expectation of the respondents coupled with their experience reveal an increasingly stringent trend on conditions for acquiring loans. The economic crisis has also affected small enterprises (Anon., (2008). Consumer demand was given a higher priority. This survey reveals that larger firms are more concerned with the access to loans and credit facilities. Only about 38% of firms with not more than 500 workers had access to credit as their main issue of concern. The access to loans by small business is also interfered with by the crisis situation at household levels. This is probably because these two are closely liked (Analoui & Karami, 2003). Households that run their own businesses have also suffered from the same consequence as the small scale businesses (Cooper, 2008). Small business applications were a mechanism deployed to guarantee loan program to small business whenever they are unable to access other loans. However these loans have not been sold in higher level markets by the banks. The credit demand analyses by the NFIB were even more discouraging than ever before (Arora & Harper, 2005). This is displayed in their survey when the small scale optimism dropped in October to the least ever recorded since the study began.It was predicted that poorly structured future plans for growth and expansion would most likely reduce the demand for credit facility (Datta & Sriram, 2012). From these surveys, it is clear that both positive and negative effects have been the result of the economic crisis experienced and felt at a global level. Generally, the small scale firms faced various discrepancies including in ability to access credit (Healeas, 2004). This is because of strict programs initiated by financial institutions that lock them out, in their bid of accessing the credits. Their potential for growth is limited by the fact that many of these enterprises do not qualify for the credit theyneed for growth of their businesses (Sullivan & Sheffrin, 2003). Banks that are relatively poor readily avail their resource to small entrepreneurs as opposed to banks that are rich (Arora & Harper, 2005). The prior tend to risk more and in turn gain subsidy in the returns of the transaction. The financial status and equity of small businesses have continued to worsen and this has also decline in the value attached to the collateral they may have used to secure credit facilities have brought a lot of despair among the small business enterprises (Manos, Gueyie & Yaron, 2013). It has also caused a reduction in sales and service provision. This is because of a reduction in the demand of small services and products. This has in turn led to the reduction in the demand for loans due to unstable and unreliable performance by the firms (Cooper, 2008). Policy responses and interventions required to deal with the situation as it is should be able to address the key concerns of all stakeholders. This would therefore require concerted efforts in a bid to restore our economic stability (Analoui & Karami, 2003).Government agencies and non-governmental organizations should be involved in addressing key issues in the small and medium scale business concerns (Healeas, 2004). The government needs to work on the restoration of market functioning and improvement of market research which will help boost entrepreneurs confidence to invest in the specific countries. There is need to expand credit facilities and encourage the investor to go for funds provided by the financial institutions. Furthermore, it is necessary to improve and provide better tools for dealing with such market problems. The Emergency Economic Stabilization Act was established to specifically perform the function of developing strategies that will help dealing with such problems (Cooper, 2008). TARP in the United States of America for instance has been charged with the responsibility of allowing funds to flow from the treasury to enterprises to cater for their financial needs regardless of their sized and scale of innovation, all investments are meant to benefit in one way or another from this initiative (Healeas, 2004). This is also supposed to reduce pressure on the institution. Governments should also lower the target federal funds as a result of the reduction in income especially so to the small business entrepreneurs (Datta & Sriram, 2012). This will help cushion them against any form of financial related pressure and enable them work in asmooth supportive environment and inturn create job opportunity for her citizens. This will help them cushion their investors against external international economic activities such as the economic recession, and unemployment as it stems from the economic crisis. This strategy was delegated for implementation by the Federal Open Market Committee (FOMC) (Cooper, 2008). Policies should be formulated to ensure that banks play their role as intermediaries in the provision of loans and credit facilities. Such provisions should be well stipulated so that it avoids biases and corruption that would favor some firms and not others. The Federal Reserve in the United States of America has worked tirelessly in a bid to solve issues in the interbank market financing strategies. It has also relieved stress on money market, mutualalthough most of these policy initiatives are indirectly affecting the small business ventures, there are seen to yield the expected results. In conclusion, small business enterprises have continued to survive the harsh economic situation through their ability to access financial resources through various ways such as loans, grants, contributions from friends, debts, delay of payment and use of cheap labor sources such as close family members and relatives. The global financial crisis has greatly impacted the world’s micro financialinstitutions and credit institutions which led to the inaccessibility of finances by the increasing stringent measures placed upon the conditions required to qualify for thecredit facilities. This has led to introduction policies that have helped mitigate the risks resulting from the global economic crisis. Bibliography ANON., (2008). Board of Governors of the Federal Reserve System. Senior Loan Officer Opinion Survey on Bank Lending Practices,, October, and July.. Top of Form ANALOUI, F., & KARAMI, A. (2003). Strategic management in small and medium enterprises. London [u.a.], Thomson. Top of Form ARORA, S. S., & HARPER, M. (2005). Small customers, big market: commercial banks in microfinance. Bourton-on-Dunsmore, ITDG Publ. [u.a.]. Bottom of Form Top of Form BUYSKE, G. (2007). Banking on small business: microfinance in contemporary Russia. Ithaca [u.a.], Cornell Univ. Press. Bottom of Form Bottom of Form COOPER, G., (2008).. The Origin of Financial Crises.. s.l.:Harriman House.. Top of Form DATTA, S. K., & SRIRAM, M. (2012). Towards a perspective on flow of credit to small and marginal farmers in India. New Delhi [etc.], Allied. Bottom of Form HEALEAS, S. P. ,. S. C. ,., 2004.. Franchising as small business growth strategy: A resource based view organisational development :. International small business journal,, Volume 9, pp. 539-59. HEALEAS, S. P. ,. S. C. ,., 2004.. International small business journal,. Franchising as small business growth strategy: A resource based view organisational development , 6(22), pp. 539-599. MANOS, R., GUEYIE, J.-P., & YARON, J. (2013). Promoting microfinance: challenges and innovations in developing countries and countries in transition. MICHAEL SIMKOVIC, 2009. "Secret Liens and the Financial Crisis of 2008",. American Bankruptcy Law Journal . MISHKIN, F. S., (2008). "Small Business Lending,". testimony before the Committee on Small Business and Entrepreneurship, U.S. Senate, , 16 April. SULLIVAN, A. & SHEFFRIN, S. M., 2003. Economics: Principles in action. Upper Saddle River. New Jersey 07458: Pearson Prentice Hall.. Top of Form SUSMAN, G. I. (2007). Small and medium-sized enterprises and the global economy. Cheltenham, UK, Edward Elgar. Bottom of Form Read More