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Sources Of Capital To Small And Medium Size Enterprise In Developing Countries

2583 words - 10 pages

During the last two decades Small and medium size enterprises have played an increasingly important role for economies worldwide and continues to be an important tool for economies especially for the growth of developing countries. The main challenge faced is the level of credit risk. The goal for a bank is to maximize the risk - adjusted rate of return; hence managing credit risk is essential for long term profitability and lending. Loans (credits) are the most common credit risk that banks need to manage (Basel Committee on Banking Supervision, 2000). In this paper, credit risk will refer to the risk banks become exposed to when they lend money to companies, in our case small and medium size firms
1.3. Sources of financing
The survival of every business depends on its ability to raise funds for its operations. Every business needs capital at least to: start up, grow, thrive, expand, compete and survive. Where do firms obtain the cash they need to finance their operations? Broadly speaking, firms generate cash through their operations. They also raise money through borrowings from lending institutions often referred to as debt financing and through selling part of their ownership referred to as equity financing.
As economies continues to face credit challenges, due to financial crisis, small businesses, especially new, small and medium size companies find it even more difficult to locate the financing they need to take their ideas and concepts and turn them into viable businesses. Although Small and Medium Size Enterprises in developing countries are a potential starting point for any enduring industrialisation that contributes to long run growth, producing and increasing the number of firms that grow up and out of the small sector, providing urban employment and in expensive consumer goods, (Kilby 1969), has been a challenge.Their inability to benefit from formal packages not only limit their activities but also limit their ability to harness adequate source of financing. Ekpenyong et al (1992).
Although it is assumed there are two major sources of financing including internal and external sources, a business can use up to five sources of capital to start a business and fuel its initial growth including:
• Personal funds and savings
• Funds borrowed from informal sources including family and friends, lenders, cooperative society, credit and savings schemes
• Formal sources including borrowings from Commercial banks
• Borrowed funds through business start-up programs. In Cameroon, like PAJER – U scheme
• Angel investors
Of these sources, all are available to small and medium size enterprises in developing countries except issuing of stock for sale. These sources constitute debt capital mostly for small businesses while large firms are open to financing in both debt and equity. Although majority of small and medium size enterprises in developing countries benefit less from very formal sources of financing with regards to credit, they end up...

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