CHALLENGES SMES FACE IN ACQUIRING LOANS FROM BANKS
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CHALLENGES SMES FACE IN ACQUIRING LOANS FROM BANKS
ABTSRACT
Small and medium-sized enterprises contribute significantly to the socioeconomic and political infrastructures of both industrialised and developing countries. The ability of SMEs to expand, grow, sustain, and strengthen themselves is strongly reliant on their ability to get and handle financing. The ability to obtain financing is a significant aspect influencing the growth and success of SMEs.
Many firms encounter significant difficulty in obtaining loans from banks, with SMEs being particularly affected. This thesis examines the debt alternatives available to SMEs
the determining variables banks assess before issuing loans to SMEs, and conducts a comparative examination of the obstacles SMEs encounter in receiving bank loans in Finland and Ghana, with recommendations for overcoming the challenges.
According to the thesis’ findings, banks generally consider SMEs as having a higher credit risk than large corporations. Before making a loan decision, banks assess managerial characteristics, capacity, environmental conditions, and collateral guarantees.
Banks in Ghana are demanding on collateral guarantees due to the significant risk of loan default by their SMEs. Poor company proposals/plans, unproductive investment decisions, unfavourable governmental economic policies, and insufficient collateral are some of the obstacles that SMEs encounter when applying for bank loans.
Information asymmetry and high interest rates are distinct lending problems for SMEs seeking loans in Ghana. Low interest rates make loans unprofitable for banks in the Eurozone, which presents a unique difficulty for Finnish SMEs.
To address some of the problems that SMEs encounter in acquiring loans, recommendations include managerial skills seminars, favourable economic and monetary policies, and government support.
Keywords: corporate finance, collateral, credit risk, equity, financial market, loan, information asymmetry, small and medium-sized firms.
. Introduction
Small and medium-sized enterprises contribute significantly to the socioeconomic and political infrastructures of both industrialised and developing countries. A vibrant and increasing SMEs sector is critical for nations’ long-term competitiveness and economic prosperity. Berger and Udell (2006).
In today’s business world, any organisation seeking to maximise profit while minimising losses requires some form of financing in order to improve the value of the owners’ investments.
In this sense, financing refers to the finances or capital raised by investors or lenders to enable a business to carry out its operations effectively and achieve its goals (Farlex 2003).
Berger and Udell (2006) stated that SMEs’ transactional returns do not match their financial demands. The ability of SMEs to expand, grow, sustain, and strengthen themselves is strongly reliant on their ability to get and handle financing.
Bank loans are one of the most reliable ways for businesses, particularly small and medium-sized enterprises, to borrow funds in order to realise their goals. Moro, Fink, and Kautonen (2014).
The ability to obtain financing is a significant aspect influencing the growth and success of SMEs. Thus, appropriate access to capital ensures that SMEs may contribute to a country’s economic growth. Many businesses encounter significant challenges in obtaining loans from banks, with SMEs being particularly affected (Moro et al. 2014).
This is not just down to banks’ unwillingness to lend to SMEs; there are other variables that limit banks’ willingness to lend to SMEs in order to assist them grow their enterprises.
Previous research suggests that banks and other financial institutions struggle to obtain information from SMEs to help them assess their operations before giving loans to them (McMahon and Holmes 1991; Mason and Stark 2004).
SMEs in various economies (developed and developing markets) have unique challenges when seeking loans from lending institutions.
The goal of this study is to investigate the characteristics that make it difficult for SMEs to acquire loans from banks. What do banks want from SMEs before offering them loans? What risks do banks assess in the market before making loans?
Compare and contrast the processes that banks employ in different markets (developed and developing) to offer loans to SMEs. Furthermore, based on its findings, the study will offer potential solutions to decrease or remove the problems that SMEs and banks face when processing loan facilities.
This thesis will investigate the obstacles that SMEs encounter in receiving loans from banks in various markets, as well as the factors that banks in various markets evaluate when granting loans to SMEs.
The research is based primarily on interviews. The nature of the research issue prompted the employment of a qualitative research method. The interviews allow the researcher to ask follow-up questions about the issue to clarify the responses offered by the respondents.
The goal of this study is not to accept or deny a hypothesis, but to better comprehend the research topic from the perspective of the respondents. The studied theories and concepts serve as the foundation for the primary research.
Corporate finance is a topic, and research on a subset of the issue necessitates theoretical conceptualization through a survey of literature on concepts and theories relevant to the studies in order to build the research framework.
The second component of the research consists of interviews with two selected banks from various markets to assess the problems that SMEs face while obtaining loans from banks.
The interview method is employed in this research because it provides accurate data from the sources used. It will limit conjecture on the research issue while drawing more exact conclusions and recommendations on it.
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