The financing aspect

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1.0 Introduction:

The aim of this research is looking into the Financing aspect of small and medium enterprise in United Kingdom and India. The research deals with finance and its issues as experienced by it owners. The financing for this area is critical as this a key area for an economy to grow.

The comparison is between a developed and a developing nation namely United Kingdom and India, as the United Kingdom is a developed economy, With India having high growth oppornitity due to it vast demographic nature.

The reason for study into the financing of small and medium enterprise is primarily derived from the author's interest in the subject mater, the importance of the reason having know about the knowledge of financing which helps to grow further with the competitive advantage. The small and medium enterprise have a flat structure, lower administration cost and growing business with a reasonable quick decision making process.

The financing is a key decision making process and having an effective financing; this helps the business to gain an advantage with its rivalry. It is significant for the reader to understand the concept of financing for small and medium enterprise. In the 21st century with globalisation inter linking the economies of the world, the small and medium enterprises have access to the different sources of finance around the world. These days financing is more complex with different financial products available. The linking of business section and social society plays a key role in the business context and especially in the field of finance.

The various stake holders specially financers, government, investors want to be involved in the business decision making process. With the United Kingdom having the Alternative Investment market (AIM) for small and fast growing companies, with such an oppournitity present, different sources of finance should support these young companies so that they get eventually listed on the alternative investment market. Back in India to get a financing from the banking sector, the enterprise requires three years of good performance and the amount of collateral for the amount of financed involved is around two times.

Generally speaking a good financing mix can grow the business in good times and protect it during crisis. The quality of finance and the finance mix determines the value of an enterprise by different stake holders and can also provide the organisation with an important basis of advantage from their competitors.

The research gives an insight about the financing aspects of the small and medium enterprise and also knowing the actual outcome of financing with a win-win situation for all the stake holders. The small and medium have their advantage in their field as these are consumer oriented business and each business is different from their competitor in some way or the other.


The author has undertaken this study on the small and medium enterprise financing primarily because of his interest in the subject matter, background related to finance and with regards to growing global importance of the concept. The study has been undertaken between United Kingdom and India. The United Kingdom is a developed economy compared to India and the small and medium enterprise here has been the key area to for the developing the economy, this has influence all the stake holders.

The issue of financing for small and medium enterprise have received great attention with advent of globalisation of business; the concept has gained in selected areas. With oppounities available in India when compared to United Kingdom, the author wants to be aware of the missing link between the borrower and the lender. This study can be significantly contribute to driving further research in India considering the size, diversity and mature of the country.

This study also gives an insight into the small and medium enterprise sector, the key areas of financing and what does the enterprise lacks in terms of securing a quality finance mix with which business can be carried smoothly.


A realistic and practical study into the financing of small and medium enterprise (SME'S) and the related issues faced by the small and medium enterprise managers in United Kingdom and India.


To be aware about the concept of small and medium enterprise in United Kingdom and India.

To evaluate the a problems faced by small and medium enterprise in financing area , and the various alternatives available for financing these enterprises.

To assess the future outlook of financing of small and medium enterprise in developing countries.


Chapter one - Introduction

This chapter provides the base for this study with aims, objectives and rationale.

Chapter two - Literature Review

This chapter presents the research literature review that is applied in this study. This chapter provides the base for chapter 3 and 4. This part is divided into area such as meaning and definition of small and medium enterprise, government policy for small business, the economic importance of small and medium enterprise, need and source of finance. Discussing few terms of financing which is used in day to day working.

Chapter three: Research methodology gives the explanation of different types of research paradigms and how it should be carried out. This chapter explains the type of research paradigms, data collection techniques, conceptual issues and limitation of research. It also shows how the author has collected the data and how it is going to be analysed. This chapter also tells about the ethical consideration for this research.

Chapter four: This chapter deals with findings and analysis. This is crucial part of report having output in the form of raw material and then shaping into meaning full information by using some tool presentation such as graph, the opportunists, table and determined the result and then compare with literature review to achieve the objective as stated.

Chapter five: It is the conclusion Chapter provides output of whole research in detail. This identifies the facts which are missing from the literature review focus on the gap between the theories and comes up any business oppournities which can be covered to cover up the gap.

Literature Review:

In the literature review part, the researcher explores the organisational Characteristics in the context of the specialised finance literature and analyse the financing behaviour of SME owner/managers in the UK and in India through in depth investigation of their finance mix and intended as well as actual outcomes. Second, we seek to deconstruct longitudinally the relationship between entrepreneurs and their providers of finance, over a period of time.

The relative and absolute importance of small enterprises has grown enormously over the last twenty years; this real growth has been matched by appreciation of their role. What were previously regarded as temporary stepping stones to real business are now recognised as one of the most vital contributors to peoples incomes and to development, however they may be defined" (Malcolm Harper, 1998) .Small and medium enterprises (SMEs) play a catalytic role in the development of any country. They are the engines of growth in developing and transition economies. SMEs play a crucial role in the economic development, industrialization and marketisation of all economies (Poutziouris, 2003).

Small and medium enterprises are nowadays recognised to be a key source of dynamism, innovators and flexible in advanced as well as developing economy. They aid in equitable distribution of income through creation of employment oppournities to many people, including unskilled labour spread over larger areas (OECD, 2006). Good ideas of business can come from anywhere and it starts in small scales then it grows into a medium and large scale depending upon the proposal of the business. In an economy if the small and medium business grows that will lead to employment oppournities, contribution to GDP, increase the disposable income, and increase the standard of living in the economy (Riding et al). The whole system is inter linked and inter connected. There is a driving force behind sme's as innovative ideas, products and services are offered. There is lack of financial support for the small and medium enterprise as the sector is characterised by information asymmetries and high processing costs, banks are reluctant to lend to SMEs. (Charted Accountant, 2005)

Within the UK the SME plays an important role in terms of job creation, GDP contribution, and growth oriented business. The developing countries also have large number of SME companies which are held back due to short skills of finance. The companies don't get the much needed long term finance as this a major concern in this business world. They are responsible for job creation and contribute to the national economy in terms of gross domestic product and economic growth. If this sector does not have access to external funds for investment and working capital to raise the capacity to raise investment per worker and there by improve productivity and wages. (

Access to finance can be critical for business to grow and to be successful, specially start up and small and medium enterprise. It can increase the speed at which the company can grow funds additional product or project development and have enough cash to run the business smoothly to achieve its target. Large companies with well established records and large assets find much easier to obtain finance as compared to small and medium enterprise as they3 have unproven management and have few tangible assets. (HM treasury, 2003)

Industrial restructuring and growing unemployment, poverty and social exclusion and the erosion of national competitiveness in international markets strengthened the case for sustained government intervention in the SME sector of the UK economy. The vast array of support policies and initiatives aimed at SMEs appears to have succeeded in mitigating some of the negative impacts of capital market failure, especially in the case of small business start-ups. In addition, support for more and better entrepreneurial activity in the UK has gained a central position in the government's strategy to alleviate poverty and minimize social exclusion. Recent research, however, tends to support the view that SMEs in the UK have encountered problems in accessing finance to support fixed capital investment and to provide working capital (Tucker and Lean, 2001).

As the western countries have developed with excellent infrastructure, large consumer spending and the Asian countries namely India, china needs vital development in infrastructure with help of western countries which will help to grow more further.

Currently this year has been beaten down in the economy recession with financial sector shaken up around the world, job loss in the entire sector especially in the financial sector, manufacturing industry, service industry.

There was a knock on effect with one sector hitting the other sector as the financial base was Finance which was shaken badly.

It is clearly stated by the chairman of federation of small business (FSB) that the small firms are at the heart of bringing the UK out of the recession and need as much support as they can get to play their part. Without the small firm the economy can falter (BBCNEWS, 2009).In India the major IT company namely Tata Consultancy Service stated that they are planning to have revenues around 1 billion dollars revenues from small and medium enterprise over a period of time. (Economic Times, 2009). It shows how important is the small and medium sector in an economy and also helps bigger companies to grow further.

Definition of sme:

There is variety of definition exist for small and medium size enterprise. There is no clear definition because of wide diversity in the business (Carter and Evans, 2000).

The most well know attempt to justify the key characteristics of a small firm is by Bolton committee. The Bolton report 1971 defines small business by reference to ideal type according to him.

"First in economic terms, a small firm is one that a relatively small share in the market. secondly an essential feature of small firm is that it is managed by its owners or in personalised way and not though the medium of a formalized management structure".

According to Bridge at el (2003) small business is generally serve local customers and having very limited share of available market. This is usually owned by one or small group of person and they manage the whole business. As per the companies act of 1985 the small and medium enterprise has been classified as stated below after satisfying any of two conditions.

Small enterprise: Turnover less then ₤ 5.6 million. Balance sheet total not more then ₤ 2.8 million and not employing more then 50 people.

Medium enterprise: Turnover not more the ₤ 22.8 million. Balance sheet total should not ₤ 11.4 million and employing not greater then 250 people. (HMRC, 2009)

In India the small and medium enterprise firms are classified based upon the investment in plant and machinery and equipment in their respective sector namely manufacturing and service sector. If the following condition is met then it is classified as per the norms.

When a comparison is made between the two countries there is a difference as there is a complete vast difference in understanding the meaning of Small and medium enterprise.

The researcher thinks that the betterment of classification for common understanding can be based upon the turnover, number of people employed and the amount of investment in plant machinery and equipment and then it should be under the classification of manufacturing and the service sector.

Economic Importance of SME'S:

According to Daly and McCann (1992) Sme have been a vital and growing part of economy of Britain. Small and medium sized enterprises (SMEs) are the foundation of the UK Economy, generating value and making a significant and critical contribution to the UK Economy, its productivity and performance. Small and medium enterprise together accounts for more then half of the employment 59.2% (approx 13.2 million people) and turnover of 51.5% in the country and also 99.9% of the business of all the enterprise as per the report of the business department of the country. (BERR, 2007). It is now widely accepted that SMEs make a significant contribution to wealth creation and net employment growth in industrially developed countries (see Birch, 1979; Birchet al., 1993), this can be interoperated from the above figures.

In India the contribution to Gross domestic product is around 15.5 % and employees around 31.25 million people in the year 2007-08 as per the ministry of micro, small and medium enterprise. (Business world 2009)

It has also been researched in India that ever ten million rupees invested by the small and medium enterprise generates employment around 151.4 people where as overall economy generates only 37.4 people. In last few years in the Indian economy the small and medium enterprise sector have grown at a higher rate then the overall industry. (Dun & Bradstreet, 2008)

The small and medium enterprise contributes to the industrial growth by adding capacity and supplying cost effective quality goods and services to meet their customer needs. They also generate direct and indirect employment for the local people in the where they have their operations. For example the Masla Bazaar chain for Asian Food store, it is a Newport based company it has it shops in Newport, Cardiff, Swansea, Bristol and London. This shop caters to need of the Asian people who are living in these areas. It does not only provide direct employment also provide indirect employment also in different as this firm procures material from different parts of Asia and locally.

With help of industrial growth and creating employment the sector also use the limited resource and local skills to meet the demands of the region they operate. The sector provides both economic and social benefit to the economy on a long term horizon. With development of small and medium enterprise n many areas it reduces the people movement from rural area to urban area.

Previous research conduct by council of excellence in management and leadership (CEML) 2002 found that 37 % of small firms fail within 3 years. While Bennett (1999) said failure rate is 85 % within 5 years. The survival rate of SME is around 20 % after 6 years as observed by Cressey and Storey (1999). According to storey (1995) small and medium enterprise has a feature of wide variance of profitability and growth compared to large enterprise.

Small and medium enterprise earnings also is volatility year on year and sometime this leads to closure of the business and the same time the survival rate of small and medium enterprise is lower compared to the large scale firms. For example a survey by a analyst found that manufacturing firms with less then 20 employees where five times more likely to fail in a given year than the large firm.


The importance of small and business enterprise is also catching in the developing economy such as India and china. For instance the UK government has attempted to address the apparent market failure to supply adequate and specific finance for SMEs. (Chami, 2001). This theory is well supported below in both the countries as follows.

UK GOVERNTMENT: Recently in this financial turbulence situation the central government has issued a policy to all public sector departments to pay all the small business bills within 10 days. (Telegraph, 2009) This policy is being implemented in many public sector but the effective utilisation of the policy will help the small business to gain much need finance and help them to stay in the business. The scheme should be more popular, so the benefit can be derived from the same.


This scheme is introduced by the government for small firms which have a viable business proposal, but have tired and failed to obtain a conventional loan from the bank for the reason of lack of security or lack of previous or current business record or may be any combined factor. In this government takes 85% of the loan if not repaid and rest is born by the bank. The maximum amount of loan can be taken is raised from .25 million pound to 1 million pound for maximum of ten years. This scheme is in place with the department of trade and industry for a guarantee. The bank after receiving the proposal and if it is viable then they ask the department of trade and industry. The draw back of this scheme we have to pay a premium on top of the interest rate. The federation of small business has called for 1 billion pound for loan guarantee scheme in 2008 to help viable small business project to have a access to finance which they are not getting from the banks. (FSB, 2009)

The local government has a good investment in the infrastructure project which creates a good and quick network from any place to place.

Indian government policy:

Indian government on the other hand has set aside a corpus fund of Rs 500crores which is administrated by the Small industrial development bank of India ltd commonly know as SIDBI. The fund is used for training, exposure programmes support innovative professional agencies and award successful entrepreneurs. (Business world, 2009).

Indian government has to spend large scale of money on the infrastructure side for development of good highways from all part these all development is taking place at a small space in India as compared to other countries. In India the public sector pays the small and medium enterprise bills are paid in and around 30 -60 days as per the terms of the contract. But the minimum time is easily 30 odd days. The government needs to gets new schemes and make it more efficient. The drawback of Indian government policy is that they are not efficient.

According to cowling and Mitchell (2003) loan guarantee schemes are integral part of small and medium enterprise policy for both developed and developing nation and very little has been done to evaluate this program. (Riding et al)

Western academics and practitioners' literature relating to SMEs finance over the last several decades (Macmillan, 1931; Bolton, 1971; Wilson, 1979; Deakins and Hussain 1994; Cruickshank; 2000 and Graham 2004) have acknowledged the importance of and financing issues for SMEs for economic .

NEED FOR FINANCE: (Money to help ideas grows)

With the wants being unlimited and resources being limited the small and medium enterprise faces the same tune of music with limited resources and ample oppournities in the market to take part, but they are lacked behind due to fall in the area of finance and it's management. For any business proposal and business ideas to be a successful over a period of time finance is needed to grow, expand and to maintain the size of business. The meaning of the word finance is art and science of managing money (Gitman, 2006). The need for finance comes for a business comes under three main categories namely

  1. Capital investment at the start up.
  2. working capital for day to day running of the business
  3. Long term capital required for growth.

"With Financial world being a Casino, then small and medium enterprise are not even on the slot machines"

With the above said statement it is seen that there is gap in the market for financing of small and medium enterprise and it is know as "Finance gap". With world being so competitive loads of oppournities present, with good and bad ideas coming from day to day experience and the problem is that does not get much needed support as it should get in terms of finance which leads to a finance gap in the work place.

Finance gap:

It is a situation where there is a profitable oppourninty but there is no or limited source of funds available to exploit this oppourninty (Carter, 2000). The term has a wide area to be covered and it is impossible to overcome within a period of time as it is a very long term work to be covered with so many business ideas, oppournities and need to be customer focused.

It is also accepted and seen practical that small and medium enterprise will never will be able to raise all the required finance as they like from banks nor they can get the cost lower if they are borrowing from other informal source of financing which will lead to financing gap. (

The small and medium enterprise lacks the idea of long term planning with given more importance to short term issues but it does not mean that the short term issued should not be handled at all. It is the long term planning that should be linked to the short term and it should have an inbuilt mechanism to remove the short term hindrances.

The finance gap has narrowed in the developed countries but not that much in the developing economies like India. In the United Kingdom we have the Dragon den show where business idea can be presented and if it a worth a deal then the person gives an equity stake in the business (BBC, 2009). A recent example of this is that a two business person from engineering background came up an idea of product that helps to solve the problem of oil spills when we have the barbeque. The product was appreciated by the den's in the show, but it did not get much need support from the den's as it lack the much needed information in terms of finance as well as other. This business product had so much potential to grow. It is also seen in the recent show that the banks do fund these entrepreneurs when Dragon don't support them and now in recession the banks have squeezed the limits of many firms. (BBC, 2009)

Small and medium enterprise has less of knowledge regarding the external source of finance as they lack quality service in terms of financial and legal environment and also in with less information access to macro economic data. This is because of lack of information available at a economical price.

The gap can be lowered by providing clear and simple rules in legal system and also in the financial market for the growing market.

In nature for any gap in the market there needs to be a reason why it is, so the next point is why small and medium enterprise get low credit?

Why Low Credit to Small and medium Enterprise?

Asymmetric Information: is where one person has economically relevant information that another person does not have. This rise in the terms of small medium enterprise finance where information of the business is not well knows to the banks. The owner of the business has more information then the lender of the money.

Low collateral: The term collateral means what can be given as security for the risk taken by the lender. The lender needs some collateral that he can recover any dues from that security. In uk generally there is a gap between the finance given and value of the security, the gap varies from proposal to proposal. The gap amounts to bear about 30 %. In Lloyds Tsb banks they offer commercial mortgage and they finance upto 70 % of the same.( Lloyds TSB, 2009) On the other hand in India, there is a gap of 25% to 30 % as per the case and most of the time commercial and nationalised banks ask for secondary collateral.

The other reason for getting loans is tough for the small and medium is the cash flow. This means how quick does the business generate cash, when we have taken a loan from the bank specially term loan, the repayment starts from the first month onwards. It is not practically possible to invest fund and generate returns that much return that repayment can be done. So in many cases the companies needs strong cash flow. Depending upon the nature of the project the banks in special cases give grace period for repayment this is know as "Capital repayment holiday". This means that capital can be repaid after certain number of days.

The draw back of small and medium financing in India is that it leads to large amount of non performing assets, in which the recovery has to be done later on and it takes time. The reason for the non performing assets to come in picture is that there is no authorised credit rating service done on individual firm. Only last 6 month bank statement is seen for the cash flow. It is difficult to get all information in last 6 months from bank statement. Low cost credit rating is not available in India and similarly small and medium business cant afford to get credit rating done on individual basis as it the cost is too high.


It is easy to get attracted to any business proposals which gives a good amount of return for your investment. But this is not true always as the investor needs a clear corporate governance of the business modelling that he is going to invest or finance. This is necessary to know what as the in depth of any business. Factoring in the basic theories of financing in terms of loan, owners capital and then on the side of corporate governance makes the business more successful. The few simple theories of financing are as follows.

Statics trade off theory:

The financial leverage should be according to the business model of the firm and the assets structure of the firm. (Peirson et al, 1995). The firm should know the benefits and cost of debt and equity financing. The benefit of debt financing is of tax as interest expenses is deductible from profit, so the business end up paying less tax. The amount of debt should not be more or else there will be a pressure on the cash flow of the company. It is simple if business has less of assets should go for less debt as compared to business more assets as there is collateral (Mc mahon and Johnson 2005). In other words the firm should have good debt equity ratio, the ratio varies from industry to industry. The trade off theory is practically help with help of trade adjustment model. This model the firm has a target debt equity ratio to which they adjust. If the firm has large debt ratio then they will try to reduce it. The debt equity ratio varies from industry to industry and also from firm to firm. It is more important to see a firm versus industry. (Mc Mahon and Johnson P, 2005)

The whole above stated theory tries to reduce the cost of capital or rather lower the cost of financial distress when they have good amount of debt to equity. Financial distress is caused when there is large amount of debt and then it is difficult to meet the financer's commitment. With practical implication of debt to equity should be in range from 1:1 to 2:1 is considered good. The SME sectors use the industry debt equity ratio to a large extent. (Voordeckers et all). The exact same concept cannot be applied when there is comparisons between SME sector and the large scale sector as large sector have full skill of expertise knowledge. The industry has to be classified according to large scale and SME ration. It is necessary that debt and equity finance should be balanced over a period of time or else in the short term to medium term run the firm will face financial distress (Weston and Brigham, 1981)

Agency theory:

This theory evolves from the principal agent relationship. In any relationship be in business or social there are conflicts which is due to information asymmetries and self interest. The agency cost is inevitable in business; it can be reduced by having good corporate governance. The agency cost varies from firm to firm and also from industry to industry. When a small company grows big the cost increases as the share holder want maximum return where as the management want to gain personal value also with company gaining its values also.

In association with theory the cost of financing is also involed. Previous study have show that it cheaper to raise debt financing as compared to equity financing (Voordeckers et all).

In other words the above stated theories tries to explain with good capital structure of debt financing and the equity financing, then clear terms of corporate governance and no information asymmetrical and lower cost of financing in the near future should be kept in mind while selecting the best method of financing the firm.

Source of finance:

For any company turning an idea into a full fledge enterprise they have to undergo four stages in the process namely concept formation, assembly of resource know as amassing of resources, product development and business development. In the first stage the funds are met by the savings, friends and family as it is small requirement. As business develops the fund requirement grows as per the size and then we have the informal venture capitalists that are more know as business angels. In the later stages we have the large corporate players and the public money coming into the company through process of offering share to the public. (Papadimitriou, s and Mourdoukoutas. P, )

As seen from the above diagram the various source of finance for small and medium enterprise ranges from personal savings, family friends to equity market. The financing mix is both formal and informal financing.

Business angels:

The word business angles mean it is private individual who offers finance in the unlisted companies in which they don't have any formal relationship. (Sorheim, R, 2005). The finance provided by them are know as informal venture capital. They are also know as wealthy individuals who invest money in unlisted high growing business( Deakines and Freel, 2003)

A small and medium enterprise firm cannot depend on the venture capitalist firm for Loans because they are in early stage of business cycle and the amount of capital required is also less. The count on banks finance is less as it is seen earlier that bankers need certain financial document for financing the firm.

The author feels that the amount of capital available to them may be limited as compared as to financing from a bank or an institutional. (Previous work experience). The worth of this industry is unknown as the information is not avaible easily, but the importance of this industry cannot be neglected.

According to Harding and Cowling, (2006) Business angles don't only provide finance to the firm but also remit management experience, access to networks, adoption to technology and also leverage effect. With mutual working, It is a win- win situation for both the financer and the fiancée. The same concept is proved by Mason and Harrison 2000.

As a individual we all love what we have and don't tend to lose on them when we try to gain something from it. You want your capital to be protected with valuable returns. Some investors are they who take high risk with greater returns. So the same concept of amount of capital with risk is involved in the business angles.

In India the concept of Business angels is very young. It is growing to grow in the near future. In some aspect of business angles can be seen as funding from friends and families members.

In the UK there is a association know as British Business Angels Association (BBAA) which is a trade body association of business angles and their networks in the country .It is the only association to promote angel investor and supporting early stages of investment. The amount of early stages of investment is around 800 million pounds to 1 billion pounds as per the association. This is the single largest source of start up investment in the country. They act as a link to many other stake holders in the industries (BBAA, 2009). Being a member of such association is useful the investor as well as the borrower to get in-depth of the business with industries networks and others areas as well.

The same kind of association is not well presented in India, with a network of business angels and small and medium enterprise. It is not a specialized community, and they don't add value to the firm or rather make you professional in business.

The upbeat thing of business angel is that they are ready to you and the terms and conditions can be convinces. Then it also varies from industry to industryIt is argued that informal venture capital provides a declaration for the small business equity gap because it lowers the informal cost and monitoring cost incurred in cost of borrowing and equity dilution is less. (Harrison, 1995)


The banks give two types of loan overdraft and term loan.

An overdraft is form of short term finance given by the banker to it's customer to overdraw from his account by an agreed amount and it is repayable in demand. (Carter 2006)

In other words when the credit account has the right to withdraw more then the balance then the account is known as overdraft account. It is form of short term loan to meet working capital requirements.

Any business which is has grown over a period of time, they tend to take an over draft facility to finance their business. The advantage of the same is that less paper work is done and sometime banks gives short overdraft facility to business just on the basis of the performance of the account. Example is that the author worked in a small scale business firm part, the bank offered the company an overdraft facility upto a certain limit just based on their account performance. This helped the company in day to day working capital of the business. In a similar case the other associate company had a large scale overdraft facility given by the banker with collateral for the day to day running of the business. The overdraft was so flexible that good relationship with banker extended the same facility few times when the limit was reached.

A study has shown that in UK the small firms depends mainly on overdraft facility and business tend to take overdraft facility some point of the time in the business. (Burns, 1995)

The other form of bank finance is the Term loan. It is and debt obligation having a maturity period between 1 to 10 years. The amount of the loan is repayable in fixed instalments. (Moyer et al). It is a fixed amount of loan for a certain fixed period, repayable in instalments. This form of loan general more then a year to say five to ten years is depending upon the nature of the project. This nature of finance is for the long term and the advantage is that loan is payable over a period of time and there is less constrain of cash flow during the investment period. The repayment is done from the investment of the funds. Sometime this type of loan is also helpful for meeting the working capital requirement over a period of time

From previous work experience it is seen that the banks gives term loan for 3 years quite easily for buying of plants machinery or small capital expenditure and for longer period a string of test has to be done to obtain the loan. The term loan is tough to get for small business as they don't have e From previous work experience it is seen that the banks gives term loan for 3 years quite easily for buying of plants machinery or small capital expenditure and for longer period a string of test has to be done to obtain the loan. The term loan is tough to get for small business as they don't have upto date of finance knowledge. When the company get term loan finance they have to give certain % of funds, this is know as owners funds, this is because the bankers need some safe guard for their investments.

As per the bank of England (2001) bank finance accounts for 61 % external finance and the importance of the bank lending is a primary source if small business as the small firm don't have easy access to capital market. ( Carter, 2006)


The term leasing and hire purchase is important source of finance after bank loan and draft. It is a form of short to medium term financing which is essence refers to hiring assets under an agreed contract. (Denzil.w). In the article written by Fox A. "accounting for lease", the meaning of lease has been stated as follows "it is contract between the lessor and the lessee for the hire of a specific assets. The lessor retains ownership of the assets but conveys the right to use of the assets to the lessee for an agreed period of time for the payment of the specified rentals. This form of financing is a convenient and sometime tax efficient source of financing.

It is understood that the companies get loan for capital investment such as buildings, vehicles loans and then the business pays the financer over a period of time. The lease can be of two types operating lease and the finance lease.

The small and medium enterprise can reduce the long term capital requirement of their business by leasing the equipments and are not investing in their capital in deprecating assets. As the payments are made in instalments there is less pressure on the cash flow. Similar there can be constrain on cash flow if the business has taken large number of lease contracts.

In India and the UK business do get vehicle loan, loan for buying offices or work place and other also.


It is process where a specialised firm assumes the responsibility for the administration and collection of accounts receivables for it is clients (Soufani.K, 2001). It is a purchase of Trade debtor of a business for immediate cash at an agreed rate (Carter .S pg 351). It is form of financing to provide working capital needs to under capitalised business. The concept of factoring works as show in the below diagram.

(Based on diagram sme invoice financing, 2009)

In the above diagram First the Firm A sells good to Firm on credit and issues an invoice for the sale of good. The issuing firm then sends a copy of invoice to his factoring company which he makes payment to his client at an agreed rate (70%-90% of invoice value). Then after doing this so the factoring firm on the due date Chase up the collection from the Firm B and on receiving the full payment from the Firm B, the factoring Firm pays the balance of due to his client (Firm A).

It helps in bridging the gap between raising invoice and time of collection of payment. With help of Factoring the firm also get a systematic report on the customer credit worthiness or his credit rating. (Lloyds'Tsb, 2009)

The term invoicing also means similar to factoring the small difference is that the financer won't collect funds from your customers on your behalf; the company who discounts the invoice needs to collect the fund from the customer. The draw back is that company himself needs to have a credit check on customers and have to chase up for getting payments, this can also lead to bad debts sometime. In many cases the customers bills are not discounted, purchase bills for which company needs to make payment are discounted. The advantage of purchase bills getting discounted from bank is that you can buy good on cash and carry basis or rather in advance payment or paying within one week time, the company can get cash discount payment. Generally you have to pay with 30 to 60 days to the bank after bill is discounted and you pay interest on the amount and number of days you have utilised the facility.

The interest is charged on the amount of the amount we have used in factoring and invoicing and with that there is a fee of generally 1% to 2 % on the amount of invoice. So at end of the time it is seen that sometime it becomes a expensive as there is charge for the same. This type of financing is used as last option when the bank limits are full used and additional funding is required.

A survey by the accountant group (Berry and Simpson, 1993) identified three main reasons why sme don't go for factoring they are cost of financing; reduce customer relation and issue of privacy. By seeing this issue invoicing is a better option as the credit management is done on the firm capability, the researcher supports this view as customer relations will lead to good credit management. Around they year 2003-04 finance provided under invoicing was around 1 billion pound for company with turnover less then 1 million pounds. (Carter.S)

Venture capitalist:

This is another form of source of finance, but it is different from normal financing scheme. They are providers of medium to long term capital with an emphasis on capital gain rather then dividend income. (Lorenz, 1989). According to Shilson's it is a way in which investor supports entrepreneurial talent with finance and business skills to exploit market oppournities and obtain long term capital gains. These types of investors invest in that newly small established company which is excepted to yield high market share with high level of profits.

Generally they try to achieve their return with a span of three to 5 years. It is form of unsecured risk financing which can lead to capital gains in the long term basis and it can also lead to loss if things go on the wrong side.

This type of finance is well known in the United Kingdom as it has been here for few years now. As quoted in the article "venture capital Industry in the uk", the venture capital is seen as funders of last resort" (Robbie and Murray)

It provides finance for start up business, expansion business and business buy outs. The venture capitalist does not even provide finance for the business but also provide management skills and development of contacts through different people. They finance the proposal which has a unique selling point and a competitive advantage. With debt fund being the company for the growth of company and unlocking it values, the leveraging effect of getting equity capital, helps the business for growth and raise large amount of money. ( Cowling. M and Hardin.R, 2006).

The UK government has created a body know ass BRITISH VENTURE CAPITAL ASSOCIATION (BVCA) in 1983. This is created to increase the awareness and the coordination in the industry. Recently the government is trying to beef up this sector as the UK is losing its share in the innovation which it was very much know for.

This form of business is risky and sometime the investor can lose the investments also. The general return excepted from this form of business is around 15 % (BVCA, 2008) .The draw for small business to seek venture capital is to give share in the business and also require expert legal and financial advice when negotiating the agreement. (BBC, 2009).

In India the venture capitalist is in small stage as compared to the UK. The amount of deals done in this area is around 15.6 billion dollars in 2007 as compared to UK 60 billion pound of investment. (VCIA, 2009) .

The investment process in the venture capitalist process is shown below.

The first stage of the process is creating an authorised base of information which can be from their contacts, brokers, lawyers and consultancy firms. The references given by the investee firm also counts a lot in the industry. This stage is know as Deal organisation. ( Kolnowski, D, )

It is not compulsory that every business will make money, so getting into the deal is very much required and it is required that all the details are short listed as per the norms of the venture capitalist. This process is known as screening. Considerable amount of business proposal are rejected in this stage. ( Zopounidis, 1994).

The screening condition also involves local government policy and the deal size of the business. The other factors depends on the investing firms can be nature of industry, stage of project development and also the area of operation.(Bliss, 1999).

The next stage is to get an inside out of the business. After screening the proposal it is necessary to get an inside view of the business much in detail. Knowing all the stakeholders such as suppliers, employees, customers is necessary so that there is transparency in the business. The process is to gain an inside view of the business with key past and future financial records. The areas also discuss here are what is offered in the market, management, returns excepted and other aspects of business.

(Fried and Hirsch, 1994).

For a successful deal evaluation the factors looked are market oppournities, skills of the management, the local policy and the external factors such as infrastructure and also fiscal policy. The most important factor for venture capital what is the return on their capital or can be termed as rate of return on the project. (Klonowski, 2005)

After a deep look into the business and knowing the entire situation what the business prospective is, then comes the stage of structuring, which is know as deal structuring. The study by Kirilenko shows that the investor enjoys an unduly large degree of control and it is seen that it is hard for management to have a cake walk in the business.

The whole process of factoring looks good but it comes at a certain price. As only certain amount of invoice amount is paid around 70 to 90% and then there is a fee on the same around 2% with the interest charge and then this type of facility is used when the firms need extra funding upon their bank limits. (Bank person)

The real working on a venture capitalist is hard to find in the book as well as there is less of academic writing on the paper, due their business secret.

The option of financing discussed above is similar to both the countries mentioned and the only difference arise is financing from AIM market which is concept of United Kingdom, this concept is not present in India. The other difference is the margin requirement in terms of financing as in case of factoring and leasing and hire purchase in UK there is maximum approval of 90% of the capital, where as In India the banks finance around70% - 80% of the amount the firms requires. The collateral problems come everywhere.

Trade credit:

It is non financial source of financing and as citied in the journal of financing gap many researcher have argued that trade credit is a important source of financing in the small and medium enterprise (OECD, 2006). The cost of capital plays an important role in any business, being in the small and medium enterprise industry the cost of capital needs to be kept at minimum. The best possible way to keep financing cost at lowest is by trade credit. It is buy now pay later deal. It is important source of financing for the business to grow.

It is the cheapest form of working obtain from trade suppliers, generally in practise it is around 45 days, the trade credit is generally reduce by giving cash discount to the customers for early payment. The trade credit varies from business to business and also from industry to industry. In a distribution business the trade credit is very less from 0 days to 10 days maximum and then industry side it runs from 4 week to 6 weeks. (Previous work experience).

A company should follow a hedging principal is based on that the cash flow generating investments should be matched with cash flow requirements of firm. In common words the short term assets should be sourced with short term financing and long term assets long term source of finance such as debt. ( Martin et all, 2008 pg 464).

Venture Financing Chain

Alternative investment market.

A diversified number of companies ranging from young, venture capital based companies to well establish business looks to expand further.

This form of financing is only available in the UK when compared to India.. It is commonly know as AIM market. It is market for small and growing companies from around the world. The market has grown to a greater extent as huge amount is raised and also the number of companies listed on counter. It can also be said as "growth capital".

For small and medium size companies AIM market being present is an important source of finance, which can be used in long term basis after company is in operation say 3- 5 years down the line. The advantage of going to AIM is that amount of money can be raised and same way the listing requirements are not as tough as the main market, there is no need to go for any collateral security as stake of promoters are being diluted by the management. (Aim report, 2009)

It is said that AIM market is suited for firms that which to raise anything less then ₤50 million. (Carter and Evans, 2006) The number of companies under AIM is around 2300, and the market value of such companies is approx to 48000 million pounds as per London stock exchange report of July 2009.

The small and medium enterprise in India lacks such type of financing as the level of risk is very high and then there are many defaulters in the market so the Investor confidence lacks in the process of financing

The author feels that the importance of getting network for the small and medium enterprise is less and the implication of the same can create a different market for the company.


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