Why companies sometimes face difficulties in raising finance

Why companies virtuallytimes hardiness difficulties in tiptop payTopic Explain what sources of pay atomic number 18 available for elfin to medium sized companies and explain why they sometimes face difficulties in raising financeIntroductionDue to the establish of modern opening move system and thoroughly in structural reforms of grocery store economy, in that location ar lot of opportunities contained in the foodstuff, simply it is likewise existing many unpredicted risks, crabbedly for the weensy to medium-sized go-ahead (SMEs) which has limited resources to resist in this unreliable environment. To survive and adapts to the environment for a SME is to maintain its advantage in meticulous daily caution and even more burning(prenominal) is to have a long-term view strategic thinking peculiarly in monetary strategy. A good finance strategy gouge help SME to crop up and expand their operations, development and besides investment (OECD, 2006), further to ra m neckcloths which make them competitively and basin get well results they want (Park, 2010). Making a finance strategy is very signifi quite a littlet to a company company has to consider both of internal condition and external environment trouble and even more factors which argon think to company. However, the SME has its particular characteristic, it is non suitable to adopt the same action with a fully gr take company they better to create a strategy which fits to the company harmonise to its demand. Finding a proper pecuniary strategy for a underdeveloped SME, non only can help SME to reinforce its essence, the more important is the sustainability of its development.Define company in that location is no accurate commentary for small to medium-sized enterprise (SMEs) and most of countries define it fit to specific condition by their dash. Nevertheless, there are some particular characteristics (Bank of England, 2001 Brookfield, 2001) about SMEs and they areThe en terprises are not quotedOwnership is often connected between family and share fiter and the bloodline is typically restricted to few individuals.Most of SMEs are small groups bloodline and al musical modes achieve self-employment effectively.In the past, the definition for SMEs from European heraldic bearing was unequivocal, it was be by individual country, for instance, Germany regulated the amount of employee under 250 was part of SME, but in Belgium, the number was became 100. However, in the recent years, the data from European Commission shows that the definition has adjusted and is qualified as a SME by some criteria (see figure 1-1) (European Commission, 2010) in headcount, turnover and balance sheet total.Figure 1-1 the definition of a small sloshed from European CommissionImportance of financeNowadays, the enterprises finance is facing a dynamic, diversification and complicated managing environment. Managing finance is not only to domiciliate a specific method or cro ok for a firm it is to assimilate the principle and manner from strategic management. father from the view of adapting to the environment and using the vantage, to pay much attention in financial long-term problem and strategic problem. In the situation of lacking of the resources for SME, to create a suitable financial strategic and well predominate the limited resource is significant since a better financial systems can help to improve the probability of successful innovation and bring further economic growth.(King, et al., 1993)The pore of enterprises financial strategy is the basic path on future development, goal and goal accomplishment for the financial action this is the end between financial strategy and other strategies. The master objective of enterprises financial strategy is reasonably to assemble, dominate and use its resources, tend to balance and course enterprises cap, as well as to build the core competitive strength and to achieve the maximisation of enter prise rate in the end. Some aspects of this goal are related/ connected to each other from the view of a long-term performance, to adjudicate the enterprises sustainability growth in financial resource and aptitude, and furthermore to accomplish the rising slope of enterprises capital value and make enterprises financial capability can sustained, lively and healthily increase, conduce to maintain and develop enterprises competitive advantage.While enterprise building the core competitive strength for their strategic management, they learn the concur from financial management. The financial management which treats capital management as a significant content, it needs to express the requirement for enterprises strategy and to fix its practice. The value of practicing the financial strategy is to retain a health condition in enterprises finance and also effectively in go forling the financial risk.There are twelve figures of finance and growth in SMEs and it can be very usef ully and provided a great help if it is supplied properly according to SMEs particular requirement (Brookfield, 2001).Initial owner support (Equity finance)Business ideal financial supportTrade creditLeasingFactoring contingency capital short-run swan loans (Debt finance)Medium term bank loansMezzanine finance reclusive placementsPublic rectitudePublic debtA company should manage its financing structure in a way that its debt and equity are in balanced manner. This fact helps company to eliminate insolvency. Excess of either debt or finance could result in loss of wealth. I will be explaining some of the important methods of financing in following section.Equity financeEquity financing is that the shareholder sells the part of unified control to put down the new shareholder by raising the capital (Watson, et al., 2007). The enterprise does not need to pay the lodge in on mavin if the capital is current from equity financing and the new shareholder can share the pay from enterprise as well. Equity financing includes stock issuance, allotment and debt for equity swap. Some gasconades of equity financing, areStock equity is firms first decline of its property, it is the base for enterprise to absorb the civil liability and to responsibility for firms own profits and losses furthermore, it is also the base for investor to control the enterprise and to go on the profit.Equity financing is the base of deciding an enterprise to the outward debt.Certainly, there are some advantages of equity financing that help enterprise in investment and management.Equity financing builds a good system in corporate governance structure, which consists of shareholders meeting, board of directors, Board of supervisors and executives. It is effectively in diminish the risk of management.In the modern finance theory, stock market is also called open market it means that the standardization financial products are traffic in a trading area with an extensively institutiona lization. It has its measuring rod and processes it in the condition of information revelation and fare dealing. In financial translation, the more important is humanityity and availability of information and that is why the stock market is better than loan market in both competitiveness of capital price and publicity of information. gage capital stake capital is the descent which is collected by private placement and set as the type of organization invest to unlisted small and medium-sized newly emerging enterprises and in the capital type of both high risk and high reciprocation. Venture capital is different from mutual fund, unit trust and securities investment fund it has its features in operating of investment and collection, such as,Venture capital absorbs the stake with enterprise the venture capitalistic needs to cooperate closely with entrepreneur and help the firm to make a plan. Management is part of investment.Venture capital is an investment in long-term and poor f lowability venture capitalist and entrepreneur become a common destiny once they invest.Venture capital is high risk and requires the venture capitalist with specialized skill, and need to achieve specialization and programmed in choosing the project, tend to avoid the risk.Before chat the financial index, the venture capitalist pays more attention in market prospect, development strategy and managing quality.Sharing the bonus from enterprise is not the direct of venture capital, they make it as a return by increase the capital when they are exiting the time for exiting is always when go on public or sell it.Debt financeDebt financing is also called bond financing, it is the way which the firm can raise money for enterprises external finance and debt can also be conducted and fitted to the requirement of issuing companies and investors (Watson, et al., 2007). It is included long-term bank loans, short-term financing (such as bills, debt receivable, and letter of credit), enterpris e Bond and short-term financial bonds, also long-term bond financing, finance lease, discount brass loans, giving medication loan, Loans from international financial organizations and private bond fund.The first disbursal enterprise needs to pay is the interest of capital which receives from debt financing and the principal on the debt will be paid to creditor at maturity (Davis, et al., 1994). The feature of purpose for debt financing is to solve the problem of deficiency in on the job(p) capital rather than the expenditure under the capital account. Debt financing can be described by two features,The received capital from debt financing is only for using, it is not the property of the enterprise, and the firm needs to pay interest and the principal is repayable.Compare to equity financing, except some specific situations that debt financing may bring creditor the problem of intervention or controlling, otherwise it is nevertheless to have the problem of corporate control.Howe ver, debt financing has its advantage for helping the firm in investment and management,The lenders have ability to collect and analyze the states of investment, also can have long-term investigate and oversee the enterprise to avoid the moral hazard.The function of the creditors right is when firm can pay aside the debt, the firm will hold the corporate control, whereas of the enterprise cannot offer the debt, the corporate control will be turned to lender.Why do SMEs stimulate financing a problem?Due to SMEs small size capital, the capability for defending the market risk is not as strong as a outstanding firm, plus a faulty finance system, it causes the problem into SMEs finance management (Pissarides, 1999). The main reasons and problem areNo criterion in SMEs finance accounting systemIn application of finance system in SME exist some problems, which make loose financial control. A loose inventorying control can lead to the stagnancy of capital and excessive final inventory the capital of final inventory always in a high proportion if compare to exchange revenue. The firm usually loses a large number of assets due to focus on capital much more than assets and even wastes it seriously moreover, to control the finished products, semi-manufactured goods and low-value expendable without a faultless system.It is negligent in managing the bills and weakness in debt receivableSome of enterprises think that it is good to hold cash (including bank deposit), and better to have more the proportion of apply is too high, it makes lot of capital cannot really run in operation, and also causes the capital idleness. In addition, some firms invest too much in real estate and lead to finance difficulty due to could not handle the emergent need of management. Also deficiency in managing running(a) capital creates problems problem capital withdrawal.Difficulty in funding, the capital is lightIt is not easy to run the SME in a practically environment, especially the u nequal treatment in funding between SME and larger enterprise. The banks are not willing to loan to them, particularly the difficulty in guarantee and lack of the specialized agency to offer the assurance service is salvage the main problem for SME and it obviously happens in some huge investments.Unrestraint in investmentThe SME is lacking of the ability to analyze the investment accurately and to measure the effectiveness of operating the capital. The majority of investment in SME is from banking, due to the take to beability of a SME is not as high as a large company, it is an obstacle in attracting the banking to invest or loan to the SME.The mode of management is backwardMost of SME is running the business as a family shop they are operation the management in a backward way and an old-fashioned thinking way, do not understand and even not willing to understand or learn the modern financial management. The proprietor always treats the enterprise as an extension of familys pr operty in raise to control the business entirely without decentralize the ownership, it causes the lost of the opportunities in growing. closeSMEs play an important role in the general macroeconomic environment, and provide the enormous opportunities for employment. However, due to the small size and limited source, usually SMEs has to face to the challenge in financing problem. For solving the problem, the major impact is from government and the law (Industrial Systems Research). In existing policy has to be adjusted by government the government needs to reinforce the related law and legislation to implement SMEs development strategy and preferential clause. Furthermore, have to set up the institution for managing and supporting SMEs development. To increase the method for financing SMEs need to respect the debt from bank and to pay back the debt on time then to sinewy the internal system and raise the handling of material. Lastly, to improve accountants structure and criterion of financial management enhance the punishment for the illegality to makes they pay attention in financial system.