Capital market as alternative means of financing SMEs

2010-06-10
THE PUNCH Newspaper-Ademola Alawiye

Despite the widely acknowledged role of small and medium scale enterprises in fostering economic growth and development, they have continued to face a variety of constraints.



Some of the challenges they face are inadequate infrastructural facilities, shortage of skilled manpower, high rate of enterprise mortality, low level of entrepreneurial skills, lack of a conducive operating environment, restricted market access and cumbersome regulatory requirements for those quoted on the Nigerian Stock Exchange.



However, a major difficulty for SMEs is the issue of access to finance. SMEs, especially in developing countries, suffer from lack of access to funds for growth from both the money and capital markets. This is due partly to the perception of high risks of the businesses, information asymmetry, poorly prepared project proposals, inadequate collateral, absence of verifiable history of past credits and lack of adequate historical records of the company‘s transaction.



SMEs are vital to economic growth and development in both industrialised and developing countries, by playing a key role in creating new jobs. They need adequate funding to meet their needs at each stage of their life cycle, from creation through operation, development, restructuring, recovery and beyond.



Funding is necessary to help them set up and expand their operations, develop new products, and invest in new staff and production facilities. Many small businesses start out as an idea from one or two people, who invest their own money and probably turn to family and friends for financial help in return for a share in the business. But there comes a time when they need new investments to expand and the capital market can be a good place to get such funds.



According to the Director-General, Securities and Exchange Commission, Ms Arunma Oteh, “The capital market can lower the cost of mobilising savings and thereby facilitate investment in the most productive technologies. It links those who have the resources to invest, with those who could use this capital to turn new ideas into businesses, generating jobs, improving living standards and contributing to the economy.”



She adds that a well functioning liquid and broad capital market is crucial to the operation of any emerging economy.



Oteh says, “Capital markets foster entrepreneurship and innovation, which in turn creates job opportunities. SMEs have a major role to play in the economic development of a nation. Capital markets are a viable way of increasing financing options to SMEs and would ultimately serve to develop the SMEs. The ability of companies in their early stages of development to raise funds in the capital markets is beneficial because it allows these companies to grow very quickly. This growth in turn speeds up the dissemination of new technologies throughout the economy. Furthermore, by raising the returns available from pursuing new ideas, technologies, or ways of doing business, the capital markets facilitate entrepreneurial activities.”



Oteh explains that the capital market should be seen as an important alternative source of finance for SMEs, through equity, debt financing, and venture capital funds.



She says, ”Equity financing is a strategy for obtaining capital that involves selling a partial interest in the company to investors. The equity or ownership position that investors receive in exchange for their funds usually take the form of stock in the company. This provides small business owners with a broader scope in terms of financing, as they gain access to multiple funding sources.



”Equity financing does not involve a direct obligation to repay the funds. Instead, equity investors become part-owners and partners in the business, and thus are able to exercise some degree of control over how it is run.



Venture capital firms can be key financing vehicles for SMEs. Venture capital funds value the possibility of monitoring the performance of the business, giving advice when needed and following-up on such advice. Capital markets provide important exit opportunities for venture capital firms, thus enabling them to put their capital at risk to finance other SME opportunities. Venture capital has the potential of offering a valuable source of finance complementing the more traditional credit finance provided by commercial banks.”



According to www.smecapitalmarket.net, ”A financial system that is built on both the banking and capital markets is better than a system that is built on the banking system alone. Flowing capital to SMEs is key to economic prosperity, because these entities are the primary job creators in most countries.



Policy makers in most countries recognise the economic development benefits of SMEs companies, and the problems they face accessing start-up capital or funds to expand their businesses. They have however, provided an alternative market for SMEs to source for funds, which the companies are really tapping into.”


 

Your comment

 

(E-mail)

 

 

 

News Archive