Background
According to Stanworth (1991), a small business enterprise is a small business entity of the market operated by the owner or young small firms that are free from outside influence in decision-making.
The European Commission defines micro-enterprises as firms that have less than 10 employees. Financing is important in the establishment or expansion of a small business enterprise.
In small businesses, financing sets the foundation for either success or failure in the operation of the business.
Reports by the Global Entrepreneurship monitor indicate that in the United States, starting and growing businesses receive funds from informal sectors totaling to about $129 billion in any given financial year. Informal sources of funds include private parties, families and friends.
Small businesses face difficulties in getting an approval to receive loans and grants from established financial institutions because their credit portfolio does not meet the expected requirements.
Financing is thus acquired through relationships and thus borrowers are expected to establish the financial stability of their business (Fielden, Davidson & Makin, 1998). The potential lenders expect to see the potential and skills in the individuals in question.
This guarantees them an assurance that they will have their money back. In addition, lenders need to be sure that the transaction will not ruin the existing relationship between the two parties.
The accessibility of financing resources to a business institution can be the difference between success and failure of a business. Whether from personal relations or financial institutions, access to resources depends on the market establishment and credit history of a business (Fielden, Davidson & Makin, 1998).
One can receive business funding through involvement in business plan competition whereby competitors present their business plans before judges. Judges choose the winner depending on the practicability of the business plan.
A new investor can be boosted by business incubation whereby the enterprise is offered services at a reduced cost. In addition, the organization can raise external funds through grants, loans and mergers.
External sources of financing require the investor to prove his or credibility and the profitability of the business.
Loans can be acquired from financial institutions like banks. For small businesses, access to loans is tricky because of the legal and economic considerations involved in the process.
The problem of financing small businesses has existed for a very long time. Small entrepreneurs lack access to funds from financial institutions because of lack of demonstrated ability to finance the loan from the operation of their business.
Seeking funds from personal relations leads to conflicts because of lack of documentation and lack of evidence to warrant legal action. Failure to solve the problem of financing small businesses will alleviate poverty levels.
In addition, it kills the dream of entrepreneurs who are willing to invest in business but face the constraint of lack of funds. The research paper explains the possible sources of funding to small businesses.
In addition, it highlights the importance of financial institutions extending financial services to small entrepreneurs as a step toward supporting societal development.
Primary audiences of this essay are business owners who face the problem of seeking resources to finance their small businesses.
In addition, the information is important to people affiliated to financial institutions so that they can gain an insight on their daily struggles of managing small business in pursuit for their inaccessible financial resources.
Moreover, the knowledge is beneficial to learners so that they can be in a position to give advice to both parties.
Problem Statement
The research objective is to understand the accessibility of financial resources to small businesses and issues related to borrowing from family, private partners and friends and how it affects the growth of the business.
Participants
The participants of the study research will include the financial managers, start-up, already established small business owners and their close friends and family.
The study sample will be chosen through random sampling of the people in the mentioned fields. Information will be obtained through face-to-face interviews using standard questions.
Methodology
The research methodology will cover the procedures and processes of data collection and analysis to be followed. Qualitative methods of data collection will be used. This is to enhance wide exploration of the research area of financing small businesses.
In addition, qualitative research methods are critical in theory building and unbiased data interpretation. Thus, the research will be able to build on a theory and draw mature conclusions.
The primary data collection methods will involve observation and face-to-face interviews, which will use a combination of unstructured and semi structured forms of questions in form of an interview guide that will contain pertinent issues under scrutiny on knowledge management.
The research will be conducted through open interviews with the use of interview guides on relevant issues concerning the research problem. The interviews will therefore be focused on questions related to the topic of study.
This will help the researcher to interact closely with the respondents and get more information needed during the research.
The negative effect of this research is that a lot of time will be required in this exercise but the researcher will overcome this through proper planning.
The questions that are commonly used in surveys and questionnaires are usually open-ended, closed-ended questions and likert scale questions. Open-ended questions do not always give answers that a respondent can choose from but allow participants to answer freely.
On the other hand, closed-ended questions provide answers for the respondent to choose from. Likert scale questions request respondents to respond to the question along a given continuum from the given responses.
Thus, the study will use open-ended questions to allow respondents to narrate their personal experiences in their daily pursuit for financial resources.
In addition, respondents will be requested to present supporting documents to verify the information they are giving. A questionnaire will be used to test validity of the research hypotheses and model (Fielden, Davidson & Makin, 1998).
A study on 14 females and 11 males from North West were interviewed to gain a clear understanding on business loan schemes. The objectivity of the study was to understand the accessibility of small business financing.
The participants expressed different levels of motivation for business ownership, education, individual health, need for recognition, and accessibility of the self-employment opportunity as compared to business ownership (Fletcher, 2003).
The participants interviewed indicated that the help they received from loans and grants enabled them to start a business eight of the women who applied for funds from financial institutions were unsuccessful.
However, the six females who were successful receive far much less than what they had asked for. Of the 14 businesswomen interviewed, 57% had one employee and 7% were willing to expand their business.
Qualifications
After my college graduation, I chose to invest in a small retail shop. I went for enquiries at a local banking institution and I was instructed to write a business proposal and give three guarantors. The proposal required $1000 but the bank gave me a loan worth $350 only without an explanation as to why I could not receive the full amount.
On enquiring from the credit officer at my bank, he explained that my credit credentials were not good enough for the bank to trust me with such a high amount. In addition, if I failed to service the loan as expected, it would be a loss to the bank.
I had business operation knowledge and skills from involvement in our family business. I resorted to seeking for financial assistance from my parents to fully finance my business proposal.
Annotated Bibliography
Mohd Amy and Siti Khadijah: Business Financing for Small and Medium Enterprise (SMES): How to strike?
The journal explains the importance of small and medium sized enterprises in the business system. Although they contribute to the Malaysian economy, they face the challenge of lack of finances to enhance expansion of their businesses.
This journal will give insights in the role played by financial organizations in supporting small business enterprises. The researcher selected ten major lending banks in Malaysia but was only able to conduct interviews with six.
Interviewees were asked to give their general experience with the small business enterprises. This was to enable the researcher to know about their experience in the credit sector.
Secondly, they were asked to give the institutions definition of the small business enterprise. Thirdly, they were asked to give a brief on the process of giving loans to small business enterprise.
Virginia Department of Business Assistance: Starting and Growing Your Small Business Journal
It gives an explanation on how most small businesses are financed. According to VDBA, 95% of startup businesses receive funding from personal relations and loans. Funds from personal relations require no paperwork.
Because of the nature of the business contract, they are likely to cause conflicts in the pre-existing relationships. Banks are the largest providers of loans to small business enterprises.
However, they need to prove that the business is profitable enough to service the loan.
United States Small Business Administration: An Interview between Ron Johnson and John Joyce
According to the interview, Ron Johnson states that the United States Small Business Administration supports the growth and expansion of small business enterprises. According to John Joyce, small business enterprises in the exporting business receive funding from loan guarantee financial programs.
The organization helps small businesses to clear their export expenses and they can pay later on after a successful business transaction. SMA supports already established small businesses to gain entry into the international export business.
In addition, it helps investors establish themselves in the market through financial and logistical support. In conclusion, in small business, financing sets the foundation for either success or failure in the operation of the business venture.
Reports tabuled by the Global Entrepreneurship Monitor has shown that in the United States of America, starting and growing businesses receive funds from informal sectors totaling to more than $129 billion.
Unofficial sources of business financing for small and medium enterprises include friends, private parties and family.
References
Fielden, S., Davidson, M. & Makin, P. (1998). Barriers encountered during small business start-up and recommendations for change. Retrieved from: https://research.mbs.ac.uk/equality-diversity/Portals/0/docs/DWP-BarriersEncounteredDuringMicroandSmall.pdf
Fletcher, M. (2003). If you wanted to know the future of small business what questions would you ask? Small Business Futures, 35(4), 305-321.
Stanworth, J. (1991). Bolton 20 years on: the small firm in the 1990s. London, UK: Paul Chapman.