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FINA1141.
 International
Business
Finance
(FINA1141)

Topic 9:

The financing of Small and

Medium-sized Enterprises in
the global economy
 Learning objectives
❑ Evaluate the access of SMEs to external finance

❑ Assess Working Capital, Capital Investment and Capital Structure in

SMEs.

❑ Analyse the Value of SMEs in the global economy.

 Small and Medium-sized Enterprises (SMEs)

Small and Medium-sized Enterprises (SMEs) are businesses whose

personnel numbers, revenues, or assets fall below certain thresholds. The
criteria for defining SMEs vary by country and industry. Generally, SMEs
are classified based on the number of employees, with small enterprises
typically having fewer than 50 employees and medium-sized enterprises
having between 50 and 250 employees.
 ACCESS TO EXTERNAL FINANCE

Access to external finance is critical for the growth and sustainability of Small and
Medium-sized Enterprises (SMEs). However, obtaining such financing often
presents significant challenges:

1. Bank Loans: SMEs frequently rely on bank loans, but they may face stringent
lending criteria, high collateral requirements, and extensive documentation processes,
making it difficult to secure funding.
2. Equity Financing: This involves raising capital through the sale of shares. SMEs
can attract venture capitalists or angel investors, but this option often requires
demonstrating high growth potential and may involve giving up some ownership and
control.
3. Alternative Investment Market (AIM): The Alternative Investment Market (AIM) is
a sub-market of the London Stock Exchange (LSE) that is designed to help smaller
companies access capital from the public market. AIM has more flexible regulatory
requirements compared to the Main Market, designed to be more accommodating
to smaller companies.
4. Alternative Financing: SMEs increasingly turn to non-traditional sources like peer-
to-peer lending, and crowdfunding. These methods can be more accessible but may come
with higher interest rates or fees.
5. Government and Institutional Support: Many governments offer grants, subsidized
loans, and credit guarantees to support SME financing. International institutions like the
World Bank and the International Finance Corporation also provide funding and advisory
services to SMEs.
 Working Capital in SMEs

Working Capital in SMEs

Working Capital refers to the funds required for the day-to-day operations of a business.
It is the difference between current assets (like cash, inventory, and receivables) and
current liabilities (like payables and short-term debts).
• Importance: Ensures smooth operations by maintaining liquidity, enabling SMEs to
pay suppliers, staff, and manage inventory.
• Management: Effective working capital management involves optimizing inventory
levels, managing receivables and payables efficiently, and maintaining adequate cash
reserves to meet short-term obligations.
 Capital Investment in SMEs

Capital Investment in SMEs

Capital Investment involves funds invested in long-term assets such as machinery,
technology, infrastructure, and equipment to improve productivity and growth.
• Purpose: Supports expansion, modernization, and competitive advantage by
enhancing production capacity and operational efficiency.
• Sources: Can be funded through retained earnings, bank loans, equity financing, or
government grants.
• Challenges: SMEs often face difficulties securing sufficient funds for capital
investments due to limited access to external finance and high borrowing costs.
 Capital Structure in SMEs

Capital Structure in SMEs

Capital Structure refers to the mix of debt and equity that a business uses to finance
its operations and growth.
• Components: Includes debt (short-term and long-term loans) and equity (owner’s
capital, retained earnings, and external equity investors).
• Considerations: Balancing debt and equity is crucial for maintaining financial
stability and minimizing the cost of capital. A higher proportion of debt increases
financial risk due to interest obligations, while excessive equity dilution can reduce
owner control.
• Optimization: SMEs need to carefully strategize their capital structure to ensure
sustainable growth, maintain flexibility, and manage financial risks effectively.
 The role of Small and Medium-sized Enterprises (SMEs) in the global economy

Small and Medium-sized Enterprises (SMEs) play a crucial role in the global
economy due to several key contributions:
1. Employment Generation: SMEs are significant employers globally, creating job
opportunities that contribute to reducing unemployment rates and fostering economic
stability.
2. Innovation and Competition: SMEs are often hubs of innovation, driving
competition and technological advancements in various sectors. Their agility allows
for quicker adoption of new technologies and business practices.
3. Economic Growth: SMEs contribute to GDP growth in both developed and
developing economies by fostering entrepreneurship, increasing productivity, and
expanding market opportunities.
4. Regional Development: SMEs are vital for regional development as they often
operate in local markets, supporting community growth, infrastructure development,
and social stability.
5. Supply Chain Support: SMEs form a crucial part of supply chains, providing
goods and services to larger corporations and facilitating economic linkages across
sectors and borders.
6. Inclusive Growth: SMEs can empower marginalized groups, including women,
minorities, and rural populations, by providing employment and entrepreneurial
opportunities.
Overall, SMEs serve as engines of economic growth, innovation, and social
inclusion, making them indispensable contributors to the global economy's vibrancy
and sustainability.