Small Business Management and Investment Readiness

Introduction

Medium –Sized and Innovative small business enterprise SMEs may only grow and expand if they have appropriate accessibility to risk capital. In the European Commission this is not at all times the case. For easy expansion and growth of SMEs, the European Commission has solved the problem by disclosing a set of events to assist small business firms get easier accessibility to external financing currently (Peacock 2004). The European Commission’s plans comprise actions to create more risk capital investments, establish bank finance for improvement and creation of accessible financing organizations that are more SME friendly. In addition to this, the European Commission has laid down the intention to work hard with an aim of tripling the yearly early-stage investment from €two billion to €six billion by twenty thirteen. The plan anticipates a raised European Commission financial involvement to early-stage funds in innovative firms, support of an internal business market for venture capital and promotion of traditional banks funding for innovation (NSW Government). The informational problems, absence of an equity investment customs and market fragmentation are amongst the key reasons for the market failing to play its responsibility in the European Commission satisfactorily. The European Commission also welcomes the member countries to presume their responsibilities (Searle 2006).

Investment Readiness

A business firm is Investment ready at a given point when it is focused and has a plan that attracts any prospective investors to have self-confidence in the proposal and to understand the potential risks (Worthington, C., et al., 2004). Business firms have to be in an excellent position and in addition, sufficiently very attractive to financial fund providers in order for it to successfully collect funds whether loans, equity, grants or any other kinds of business finance. A business firm with higher investment ability that makes the funds providers ‘feel right’ regarding advanced funding that may have higher chance of getting funding that can be obtained cheaply and faster. (Douglas et al 2002).

Basically, getting a business firm investment ready is all in relation to circumspectly grooming it and its employees to present the accurate proposition and image to bankers and investors (Davis 1996).

The need “for Investment Readiness”

In most SMEs, there is a basic knowledge gap such that they are not familiar with their relevant source financial strategy and option. Furthermore, there is also clear proof that various SMEs fail to seek funding for the reason they are not sure concerning the process and resistant to surrendering any equity because of concern about losing power over the management of the business firm (NSW Government). Moreover, the low value of request for funds results in very high disappointment rate, predominantly for non-bank risk money business firms. Various business plans can have intrinsic merit but are either unsatisfactorily developed or are improperly structured. This reflects faultily on the entrepreneur’s capability (Terjesen 2007).

Factors that determine the ‘investment readiness of growth SMEs

Supply and control of market

If the supply side is controlled on a low overhead basis, funding for small business firms will merely turn into more freely accessible at a reasonable price. This applies that lower due diligence fees and costs, and these ought to be lessened if possible investee firms can turn out to be more ‘investment ready’. However, the small business firm should also be a further flexible business-oriented. On the side of the investors, particularly when the investee firm is in its initial stages.

Investors have to be aware that small commercial businesses, particularly in their initial stages, unavoidably have few of track records than larger commercial businesses. The small business enterprises are more reliant on the entrepreneur and hence their business plan may experience frequent change. Moreover they require a business investor who is accustomed to this kind of investments, with its much dependant on instinctive judgments.

Business debt and equity ratio

Conspicuously, business planning, firm size, business objectives and family control are to a large extent connected with debt (Pooled Development Funds Program). Small family owners of businesses that don’t have proper planning processes in place have an affinity to relay on family loans as a source of financial support (Pooled Development Funds Program). On the other hand however businesses that are run by families especially in the service industry are often less likely to get loans from the family in comparison to entrepreneurs who intend to obtain a business growth venture using the new technology or goods and products development (National Investment Council Report 1995). The utility of the profits obtained is essentially important for the planning of enterprises and the expansion of the investments, this profit can be injected into the family business to increase the sales and also productions, although it is quite common to find that the family owned businesses especially in the lifestyle and industrial sectors use such a strategy. Equity is usually a feed back of the entrepreneurs of the performances of firms which have the intention of getting to greater business heights and also magnifying the amounts of profits. Nevertheless, equity is less probable to be contemplation for family business owners and also the ones that have a partiality for maintaining family control (Douglas et al 2003).

SMEs and Credit Rationing

Small businesses get it more complex to acquire bank loans compared to large firms. And given that they do acquire the loans, it is frequently at very higher interest rates and on more rigorous terms of service than large business firms. For instance, in Canada, this condition is still worsened by the discernment among the small business society that, in relationship with other states, they get it even more complex to acquire bank loans.

Small business restriction to accessing bank debt may not be openly attributable to business size but, rather, to troubles linked with the accessibility of information from which projects are assessed. They squabble that such information troubles are not unusual to the small business sector only, but are principally there with a reason of the expected elevated costs of information-gathering linked with that sector (LeMesurier 2006).

The lending of business expansion loans by a financial institution to an entrepreneur can be made so simple in a way that there can just be a simple agreement between the two parties which can be used to broker the deal in order to enable the small firms to competitively get access to the funds. This connection potentially may be the cause of problem of information asymmetry.

In summary credit rationing may questionably obstruct risky businesses firms to obtain equity financing for the reason that they are not in a position to secure debt capital – quite probably angel investments. Hence, labor on credit rationing is essential in this context due, in relation to some finds, SMEs firms that are not given bank credit may be also be prevented from seeking finances in the equity markets. This may be predominantly factual for riskier, smaller businesses and proposes that equity financing seek from private financial investors can not be a substance of choice – that credit rationing might be an aspect that promotes SMEs to obtain informal investments (Worthington 2004).

Collateral and Good Reputation

The challenge which can be as a result of the morals and selections can be addressed by building a good track record or forwarding an asset to act as collateral (May, 2006). Good reputation coupled by significant collateral is a good strategy for entrepreneurs who are low risk takers to enable them to access funds in order to improve their status. Collaterals that basically involve assets have enabled numerous enterprises to grow in a much remarkable way and enabled them to promote their growth at the expense of the assets which they give the financial institutions to act as collateral (National Investment Council Report 1995). If there was no such provision of collateral and fostered reputation, the SMEs could be deprived of /from accessing this dearly needed credit just because these small firms own less reputation which means that no financial institution which involves itself in lending could develop confidence in them (May, 2006). This therefore means that small enterprises especially those which are up coming find it hard to raise capital compared to large firms. In addition, there is extensive improbability surrounding the growth and survival of SMEs, their asset-supported collateral are frequently treasured at ‘carcass value’ to make sure that the loan is practically covered in provision of evasion and instant realization. This shows that the SMEs who finds it hard to go might end up requiring even a larger proportion of the forwarded collateral in comparison to the stable and well thriving big firms (Burgess et al 2007).

Furthermore, SMEs are commonly under-capitalized (Pooled Development Funds Program). Since the condition structure of financial loans awarded does not apply to their needs. Almost all the SMEs usually need a provision of finances to act as long term capital; on the contrary, financial institutions are usually only ready to give loans to short-term borrowers (Worthington, C., et al., 2003). For this particular reason SMEs have, been forced to desperately depend on this short-term loans in attempting to fund long term goals and objectives which in most cases might not work out to be a success (Madden 2004).

SMEs As Perceived By Informal Business Investors

The readiness of SMEs borrowing funds from informal lenders is one way of categorizing and classifying the SMEs. According to Madden (2004), “The most important two investment assessment criteria applied by informal investors are market potential and quality of management of the service or product. An active role is undertaken by Formal venture capitalists in assessing due diligence and taking control of the risk on the element of the business enterprise”. They consequently experience more reliance on the potentialities of the management team. There primary rationale why an investor will accept or reject a business deal. Eliasson et al (2003) on the other hand asserts that, “Inventors find out that the primary rationale (‘deal killer’) is managerial capability, and in addition the primary (‘deal maker’) is the growth prospective of the opportunity and the entrepreneur(s)’ ability to take in those potentials”.

Eliasson et al (2003) continues to elaborate that, “The disparity in assessment of business firm between owners and investors throughout investment negotiations is a frequent source of contention. This is predominantly important, for example, when angels secured common shares or convertible securities in swap over for their investments. For the reason that these are not listed business firms, they have no other arms-length or market-determined value means of valuation”. In the long run, investors commonly recognize entrepreneurs’ “inflated” assessment of their performance businesses as an obstruction to investing.

Some of the initiatives which might be helpful in overcoming the challenges and problems faced by SMEs in acquiring capital for growth

Creative Equity-Type and Sustainable Source of Finance Instruments to SMEs

Establish sustainable and creative equity-type source of finance instruments to SMEs.

Securing long-term value added capital to accelerate and finance the growth of SMEs is one of the major challenges experienced by SMEs. To solve this problem, the IIC has pronounced its obligation to put in place strategic plan to establish sustainable and creative equity-type source of finance instruments to SMEs. This plan will create significant demonstration impacts, and hence will draw other private investors putting in considerations to prove this kind of financial sources to SMEs. By the utilization of this strategic, it is anticipated that SME accessibility to capital will be elevated and encourage growth on sustainable and large scale (Henneke et al 2006).

However, a fascinating facet of this strategic is that it may not only give financial findings via equity-type source of finance, but also find out to offer value-added assistance, for instance improved governance framework and performances in those firms receiving financial grants from IIC. This vision on advanced authority will be availed through the means of IIC training for SMEs. Additionally, technical support will also be offered in other main areas, such as environmental sustainability measures, including the introduction of control measures to lessen the emission of greenhouse gases (Fitzsimmons et al 2006).

Matchmaking Services

These services target the unification of entrepreneurs and potential investors according to LeMesurier (2007) “Effort to assist resolving the inefficiencies in the informal investment markets, first and foremost the fragmented and invisibility environment of the market as well as the deprived communication channels, a diversity of matchmaking services have materialized in the course of the efforts of both the public and private sectors”.

Three main applications to matchmaking have been established. The foremost is the production and distribution and of investment press releases with small details descriptions of business firms searching for capital for giving out among probable investors.Hosting of potential investors gatherings at which finance –searching entrepreneurs displays short presentation to an audience of probable inventors is the second method (Worthington, C., et al., 2003). Computerized matching connected to investor’s interest database and business characteristic is the third application, which has obtained the majority attention in the academic literature.

Preparing Entrepreneurs

Helping SMEs get ‘ready’ for investment according to Higgs et al (2004) “is perhaps the primary thing that needs to be put in practice by assisting them to attend to the investment criterion utilized by informal investors. Attending to the two most significant of this criterion, quality of control (the ‘deal killer) and the market prospective of the ‘deal maker ‘(opportunity) – could to a large extent lessen the high dismissal rates by angels”.

Entrepreneurs are required to understand the actuality that the only ‘collateral’ casual investors own is management’s capability to attain results. Before approaching potential inventors’ entrepreneurs, it is very significant that they combine together managerial efforts. The utilization of stock option is one way of drawing the attention of high competence professionals exclusive of the instant need for considerable amounts of cash (Fitzsimmons et al 2006).

Tax Incentives

Informal investors usually have a higher tendency to reinvest in the casual market. About ninety percent of informal investors would reinvest in a casual risk capital investment. In addition about eighty six percent of informal investors who had identified other investment kinds more gainful may still invest in angel variety projects (Worthington et al 2003). This significant re-circulation of inventive capital is suggested down by elevated capital gains tax in, no less than, two important ways. Primary, it lessens the keenness of investors to recognize their capital gains (De Bruyn 2007). Subsequently, it reduces the amount of the created gain that ultimately goes to the investor. It is not irrational to think that related reductions aimed at the informal private sector can attain comparable results (De Bruyn 2006).

Bridging the ‘investment readiness’ gap for SMEs

In a number of United Kingdom regions the perceptible gap in this market is being tackled by a range of different methods, often connecting a corporation between an agency with the most important link with SMEs and expert advisers (Searle 2007).

Conclusion

Any financial intermediation success depends on several factors. The excellent performances in financial intermediation, in particular for SMEs, are found in three categories: primary, the investment environment must pick up through coherent policies, improved accessibility to financial sources, and stronger organizations. Subsequently, the financial sector is required to turn out to be broader based, efficient and competitive to offer SMEs with substitute sources of investment capital, an expanded assortment of innovative and new products, cutthroat rates, and proficient services to make their investments practicable. Thirdly, enhancement of trades, business skills, and entrepreneurship knowledge and ease of access to information from other advisory service centers could be a proper way of initiating and promoting the success of SMEs. Consequently, a three-pronged strategy where the fundamentals are jointly matching is required to be implemented to establish a strong foundation for an effective and efficient financial intermediation scheme that will sustain private-sector expansion and help to speed up economic growth (Golis 2002).

References List

Burgess, et al., 2007. Go with the growth. BRW, 29(16), pp. 90-91.

Davis, 1996. The institutions of investors in the evaluation of financial structure and behaviour. Fdey: Malcon.

De- Bruyn, Simon, 2006. Angels fly the flag. BRW, 29(10), pp. 68-69.

De-Bruyn, Simon, 2007. Fun and games. BRW, 29(16), pp. 62-63.

Douglas, et al., 2002. Exploring investor readiness: assessments by entrepreneurs and investors in Australia. Venture Capital, 4(3), pp. 219-236.

Douglas, et al., 2003. The Impact of debt and equity on the decision to be self – employed – an Economics Perspective. In: Academy of Management Meeting. USA: Seattle publishers.

Eliasson, et al., 2003. Entrepreneurial management: corporate venturing, and financial performance. In, frontiers of entrepreneurship research. Babson College: Wellesley, Massachusetts.

Fitzsimmons, et al., 2006. Entrepreneurs and funding decisions: evidence from Australian SMEs. International journal of entrepreneurship and small business, 3(1), pp. 76-91.

Golis, C., 2002. Enterprise and venture capital: a business builder’s and investor’s handbook, (4th edition). St. Leonards, NSW: Allen & Unwin publishers.

Henneke, et al., 2006. Asset correlations and capital requirements for SME in the revised Basel II framework. Banks and bank systems, 1(1), pp. 75-92.

Higgs, et al., (2004). Transmission of returns and volatility in art markets: a multivariate GARCH analysis. Applied Economics Letters, 11(4), pp. 217-222.

LeMesurier, K., 2006. Small and starving. BRW, 28(22), pp. 48-49.

LeMesurier, K., 2007. What venture capitalists want? BRW, 29(4), pp. 56-60.

Madden, K., 2004. A new type of dialogue: the third sector: Financial advisers and affluent donors. In: ANZTSR 2004 conference proceedings, seventh biannual ANZTSR conference: building bridges and strengthening bonds: broadening the third sector across regions and diversity. Brisbane, Australia.

May, J., 2006. New ventures go begging. Business Review Weekly, 28(24), pp. 32-33.

National Investment Council Report (1995). Financing growth: policy options to improve the flow of capital to Australia’s small to medium enterprises. Canberra.

NSW Government, Funding business growth: a guide to raising capital. Web.

Peacock, R., 2004. Understanding small business: practice, theory and research, (2nd edition). Adelaide: Scarman Publishing CO.

Pooled Development Funds Program. Web.

Searle, J., 2006. Afloat on a sea of dreams. BRW, 29(1), pp. 56-57.

Searle, J., 2007. Big money seeks small business. BRW, 29(8), pp. 48-51.

Terjesen, S., 2007. Informal investment and venture financing In Ireland. In: Landstrom, H., Raffa, M., and Iandoli, L., (eds.) Entrepreneurship, Competitiveness and Local Development Frontiers in European Research.

Worthington, C., 2003. Emergency funds in Australian households: An empirical analysis of capacity and sources. Financial counseling and planning, 15(1), pp. 21-30.

Worthington, C., et al., 2003. Art as an investment: short and long-term co movements in major painting markets. Empirical Economics, 28(4), pp. 649-66.

Worthington, C., et al., 2004. Art as an investment: risk, return and portfolio diversification in major painting markets. Accounting and Finance, 44(2), pp. 257- 72.