Small and medium enterprises or SMEs hold a special place in the economy of developing countries as it is critical for the development and growth of the society and economy.
The role of SMEs in emerging markets acquires immense importance due to its ability to assist low income groups in generating income and in creating jobs.
Governments in the developing countries are eager to support this sector of business that has contributed to the development of a strong private sector and has also fostered social stability and economic development. Like any other business, the growth of SMEs is dependent on proper access to the financial services. That banks attach special importance to SMEs would be evident from special financing schemes exclusively for them and is termed as SME finance.
The importance of SMEs
The SME sector as a whole is considered important for many economies. In the UK, half of the national income and half of the employment are generated by SMEs, thus making it extremely important for the country’s economy. The size of SMEs often works to its advantage as its structure allows a lot of flexibility that also facilitates quick innovation. It is also easy and quick for SMEs to adapt new technologies. These abilities of SMEs make it attractive to other big companies that lose no time in acquiring the smaller entities to exploit the full potential of its innovative capabilities. SMEs thus add more value to the economy by allowing scale up of innovations.
Fund raising is difficult
Despite huge potential in creating new businesses and adding more value to it through innovation and better use of technology, SMEs still find financing a difficult proposition. It is common to hear that SMEs are deprived of proper financing opportunities that can boost their creative capabilities and growth. SMEs do receive finance but not in the way they want. This creates a gap in financing.
Investor funds are mostly directed to big companies and government projects as investors feel that SMEs are less attractive. In addition, there is a general perception that it could be risky to invest in SMEs due to uncertainties that are quite high. From the investor’s perspective, return on investment from SMEs does not make investors happy and some SMEs have limited internal controls as they are out of the purview of stock exchanges. Many SMEs can even get a waiver on annual accounts auditing in the U.K.
Funding options
Funds for SMEs are usually available from banks and other modes of financing. Banks finance SMEs against collateral securities like land and machinery and can even arrange for overdraft facilities. Leasing assets instead of investing in it is another financing option that is available. Other methods of financing can include trade credit from suppliers and other creditors, invoice factoring and discounting as well as depending on friends and family for financial help line whenever it is needed.
The best thing about SME financing is that although it is not always easy, it seldom becomes show stopper.
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