Sources of Finance - Essay Example

The major challenge faced by SMEs is to access the capital to take advantage of new investment opportunities. The studies on SME financing in the past showed the lack of financing a major constraint for start-ups as well as expansion but recent statistics show an improved capital access for SMEs. This essay aims to present the definition of SMEs from the point of view of European Commission, the sources of finances available to SMEs along with the suitable financing options according to the stage the SME is in, the barriers SMEs face in procuring the capital or if the financing constraints still exist, and the steps needed by policy makers to provide congenial environment to SME sector.

Background of Small and Medium sized Enterprises The Small and Medium sized Enterprise can be defined in two ways- Quantitatively and Qualitatively. The quantitative definition is based on the various criteria set by the different countries. Qualitatively SME can be defined on the basis of ownership which is limited to a few individuals. SMEs are privately owned with low volume of sales and a very few employees. The definition regarding the number of employees varies from country to country with 15 employees in Australia under Fair Work Act 2009, 50 employees under EU and a little less than 500 employees in USA to qualify for Small Business Administration.

The European Commission has given a definition of an SME which qualifies an enterprise to be small or medium sized enterprise if it fulfils the criteria of maximum ceilings in either one of staff headcount, turnover or balance sheet given in Table 1. Table 1: Qualification to be an SME (Source: European Commission-a, 2009, p.3) This new definition was adopted by EC in 2003 and came into effect in 2005. The main reasons behind adopting new definition were to improve availability of capital, to update thresholds and to improve access to R&D and promote innovation (European Commission-b, 2005, p.8-10). The European Commission works on policies regarding SMEs throughout Europe and assists them through business support measures.

In 2010, the number of SMEs in EU was around 20.8 million, 99.8% of the total enterprises. These SMEs employed 87.5 million people, almost two-thirds of the total employed people producing GVA of 58.4% (Cambridge, 2011, p.8). In 2010, SMEs accounted for 60% of UK’s total public sector employment and 50% of the private sector turnover (Turner, 2010). In February 2011, UK ministry announced the reform measures specifically to open-up public sector markets for SMEs. This included the set-up of ‘contracts finder’ a source to access information regarding procurement, tenders and contracts and directives to government departments to set targets to increase businesses with SMEs.

They also presented an SME Action Plan taking into account the limited means to increase non-UK business for SMEs in UK (Foreign & Commonwealth Office, 2011). Sources of Finance for SMEs Finance is considered a key element that drives the SMEs to successively build productive capacities and create jobs. Without capital, SMEs cannot acquire