Small and Medium Enterprises (SMEs) are an integral part of any economy and play a vital role in supporting a stable economic environment. They are crucial in upholding the growth and existence of economy especially that of developing countries. SMEs are driven by combined efforts of private entrepreneurs, government and financial institutions.
Developing financial sensibilities
One of the key elements for an SME’s success is access to finance. In developing countries, SMEs face a number of hurdles while achieving the financial resources for building up of their businesses. Finance is crucial for any SME to acquire or absorb innovative technologies. Their expansion to global markets or association with other firms is also related to the availability of finance. Traditionally, SMEs find it difficult to avail credit or equity. Even maturities of commercial bank loans offered to them are limited to a very short period. Similarly, lower interest rates are extended to a very few companies.
SMEs are often considered to be high-risk borrowers because of insufficient assets and their vulnerability to market fluctuations. They are also very much susceptible to mortality. The existence of an information asymmetry caused due to lack of records in accounting and inadequate business plans often make them a difficult choice for creditors and investors. Also, the high cost of transaction or related administrative costs of lending small amounts make lending to SMEs a risky proposition. Even then, banks turn out to be the biggest supporters of SMEs. It has also been proven that banks would benefit commercially from lending to SMEs.
Developing financial sensibilities
One of the key elements for an SME’s success is access to finance. In developing countries, SMEs face a number of hurdles while achieving the financial resources for building up of their businesses. Finance is crucial for any SME to acquire or absorb innovative technologies. Their expansion to global markets or association with other firms is also related to the availability of finance. Traditionally, SMEs find it difficult to avail credit or equity. Even maturities of commercial bank loans offered to them are limited to a very short period. Similarly, lower interest rates are extended to a very few companies.
SMEs are often considered to be high-risk borrowers because of insufficient assets and their vulnerability to market fluctuations. They are also very much susceptible to mortality. The existence of an information asymmetry caused due to lack of records in accounting and inadequate business plans often make them a difficult choice for creditors and investors. Also, the high cost of transaction or related administrative costs of lending small amounts make lending to SMEs a risky proposition. Even then, banks turn out to be the biggest supporters of SMEs. It has also been proven that banks would benefit commercially from lending to SMEs.
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Find the right investors
Besides assistance from banks, SMEs can also rely on private equity firms which are experienced and expert in their businesses. They would prefer to invest in businesses which have a potential to grow. Many SMEs do not prefer such investments because of the interference by the equity firm members. However, there are certain investor firms who prove to be a viable option for funding as they use their own money for funding various initiatives.
Society has seen a new spurt of CEOs and successful entrepreneurs who are investing in new ventures and ready to support upcoming SMEs. These investors also provide their expertise to the firm and support them with their management skills. Bombay Stock Exchange (BSE) has already kick started its SME platform with the Rs 8.5 crore initial public offer (IPO) of a non-banking finance company (NBFC), BCB Finance. This has set high hopes for Indian SMEs who can now raise domestic capital for their own requirements through this way.
Alternatively, since SMEs have a bigger scope of getting their funds from banks, they can improve their credibility. Another solution offered is maintenance of better business plans, improved credit ratings and maintaining reliable financial information which would help banks and financial institutions in having more confidence in lending to SMEs.
SMEs can also go in for mergers with other firms to complete their fund requirements. Mergers also provide them opportunity to enter into international markets and form strategic alliances to expand their business and enter new productions. SME sector of any country is expected to drive the growth of any country’s economy and offer a significant opportunity for various investors to contribute in the future of a country.
Besides assistance from banks, SMEs can also rely on private equity firms which are experienced and expert in their businesses. They would prefer to invest in businesses which have a potential to grow. Many SMEs do not prefer such investments because of the interference by the equity firm members. However, there are certain investor firms who prove to be a viable option for funding as they use their own money for funding various initiatives.
Society has seen a new spurt of CEOs and successful entrepreneurs who are investing in new ventures and ready to support upcoming SMEs. These investors also provide their expertise to the firm and support them with their management skills. Bombay Stock Exchange (BSE) has already kick started its SME platform with the Rs 8.5 crore initial public offer (IPO) of a non-banking finance company (NBFC), BCB Finance. This has set high hopes for Indian SMEs who can now raise domestic capital for their own requirements through this way.
Alternatively, since SMEs have a bigger scope of getting their funds from banks, they can improve their credibility. Another solution offered is maintenance of better business plans, improved credit ratings and maintaining reliable financial information which would help banks and financial institutions in having more confidence in lending to SMEs.
SMEs can also go in for mergers with other firms to complete their fund requirements. Mergers also provide them opportunity to enter into international markets and form strategic alliances to expand their business and enter new productions. SME sector of any country is expected to drive the growth of any country’s economy and offer a significant opportunity for various investors to contribute in the future of a country.
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