The Bolton Committee (1971), was the first to attempt to solve the definition problem by implementing an “economic” and a “statistical” definition. According to their economic definition, a business is considered small if it meets the following requirements. firstly, if the owner is part of the management or manages it personally and not through another formalized management structure. Secondly, whether the market share is relatively small and, finally, whether it is governed in the sense of not being part of a larger company. The Wilson HMSO Report (1979) identified the problems of owner-controlled independent small and medium-sized enterprises employing fewer than 200 to 500 people (SMEs). More recently, the European Commission (EC) has also classified the small business sector into three components: micro-businesses with 0 to 9 employees, small businesses with 10 to 99 employees, medium-sized businesses with 100 to 499 employees. Say no to plagiarism. Get a tailor-made essay on "Why Violent Video Games Shouldn't Be Banned"? Get an original essay Banks remain the main provider of external finance to SMEs (Cosh and Hughes, 2003), although there may be various financial constraints (Kotey, 1999 ;Fraser, 2005). Access to finance is influenced by financing preferences ( Hamilton and Fox, 1998 ), such as pecking order theory ( Howorth, 2001 ), or banks' risk aversion. This risk aversion may lead to a preference for financing less risky ventures or “better borrowers” ​​(Cressy and Toivanen, 2001), which may exclude women and ethnic minorities who may not appear as credible in the eyes of financiers. There is certainly evidence that ethnic minorities face difficulties in obtaining finance (Ram and Smallbone, 2001; Ram and Deakins, 1996; Bank of England, 1999). Additionally, I will outline a literature review on barriers to SME financing across various methods of raising external capital. I also address the requirements that management is required to have and the problems that arise from them. Additionally, I provide some solutions to these problems and recommendations that a student might find interesting and useful. Importance of SMEs and main financial obstacles. The role of MSMEs with respect to innovation and the promotion of industrial development, job creation and market competitiveness has been recognized by both academia and policy makers F([1] Beck et al., 2005; [2 ] Thurik and Wennekers, 2004; [ 3] Ayagari et al., 2003; Davidson and Henderson, 2002 [4] Storey, 1994; It is known that both developing and developed economies attach great importance to micro-small medium-sized enterprises. Small and medium-sized enterprises SMEs contribute significantly to the economy, especially in developing countries. Formal SMEs contribute up to 60% of total employment and up to 40% of national income (GDP) in economies. emerging (World Bank, 2015) Internal and external barriers. According to the economic status of the country, business barriers change, while i Developing countries have problems with labor resources or limited availability of financial services. For example, approximately 97% of businesses in Mexico and Thailand are micro-small businesses Kantis, Angelli and Koenig, (2004) Timmons, (2004). In the United States, over 96% of businesses have fewer than 29 employees (US Small Business Administration and Census Bureau, 2006) Institutional Barriers to SME Growth ''Related literature has demonstrated that access to external financing is determined by legal conditions and financial context” (La Porta, Lopez-de-Silanes, Shleifer and Vishny,1997, 1998; Demirgüç-Kunt and Maksimovic, 1998; Rajan and Zingales, 1998). ''A direct implication of these studies is that, in countries with weak legal systems, and consequently weak financial systems, firms obtain less external financing, which translates into lower growth.'' Beck, et al., (2008) The seminal literature on entrepreneurial startups suggests that liquidity constraints can hinder or even prevent someone from creating a new venture (Evans and Jovanovic, 1989; Holtz-Eakin et al., 1994; Blanchflower and Oswald, 1998). Traditionally, the focus has been on obstacles created by commercial banks or equity funds, or on imperfections in the broader institutional environment (InfoDev, World Bank, 2004). However, it is important to note that SMEs sometimes have a negative attitude towards bank loans and financing (Howorth, 2001). Therefore, there is a significant impact on financial decisions on the demand side. (InfoDev, World Bank, 2004) In the 1980s in the UK it is also stated that, when times were tough, small businesses that were most dependent on banks, protested vigorously at the apparently unsatisfactory nature of their relationship with them. (Binks et al. (1992), Cowling et al. (1991), Bank of England (1993). For example, the impact of the US "credit crunch" of the early 1990s and the effect of the consolidation of the Also the banking sector on the availability of credit to small businesses has been the subject of much research in recent years Berger & Udell, (1998). Consequently, monetary policy shocks may have affected small business financing to a large extent generated substantial research and debate. Management responsibility for raising capital and constraints of financiers in terms of SME management. Much empirical and subjective research to identify the causes of small business failure seems to focus on the internal factors of the company, which principle is often perceived as “bad management” followed invariably by some financial deficiency such as undercapitalization or inadequate cash flow Research published by Dun and Bradstreet (1991). Researchers have shown that a small business is typically characterized by the unique set of skills and preferences of a single person, the business's manager. Therefore, the long-term outcome, in terms of success or failure of a specific small business, can be strongly influenced by the personalities, expectations and capabilities of the founder and his or her fundamental motivation in creating the venture Jennings & Beaver, (1995) . It should also be noted that entrepreneurs and owners can destroy their business due to the abuse or mismanagement of position power. Beaver and Jennings, (1996). Being an entrepreneur-manager-owner at the same time requires a high level of knowledge and innovation, some of the required skills are illustrated in the tables above. By failing to address this task, the company may undergo a period of corporate development, which leads to a certain amount of growth and expansion, such that each role may be played by separate individuals (Jennings & Beaver, 1995). Irwin et al., 2010 have publicized research that highlights several factors (see appendix 1) at play that, together, make it more likely that some groups are less able to articulate their proposals effectively or are less likely to be able to implement their proposals. commercial proposal effectively and are therefore considered too risky by banks. It is therefore recognized that some personal characteristics are indicative of a higher risk (young people, for example, with no previous record, no savings and noguarantees). But for this reason they believe that there is no discrimination based exclusively on personal characteristics. Irwin, et al., 2010 research on Barclays clients who achieved successful business outcomes shows that personal savings were the primary source of financing for owner-managers, representing 70% of all companies studied. Owner-managers who used bank loans accounted for 7% for business bank loans, 8% for personal bank loans, and 13% overall. Furthermore, Fraser (2005) found that 10% of businesses face financial constraints, but Irwin et al. (2010) found that approximately 16% of respondents had difficulty obtaining financing to start their business. The same survey suggested that ethnic minorities faced greater difficulties in obtaining finance (Table III, Appendix 1). Only 13% of White respondents reported financial constraints compared to 22% of Asians, 50% of Blacks, and 21% within the other ethnic group (including Chinese, etc.); this result appeared to tentatively confirm previous studies (e.g. Curran and Blackburn, 1993; Ram and Deakins, 1996; Bank of England, 1999; Ram and Smallbone, 2001). Raising external debt finance Banks remain the main provider of external finance to SMEs (Cosh and Hughes, 2003), although there may be various financing constraints (Kotey, 1999; Fraser, 2005). Access to finance is influenced by financing preferences ( Hamilton and Fox, 1998 ), such as pecking order theory ( Howorth, 2001 ), or banks' risk aversion. This risk aversion may lead to a preference for financing less risky ventures or “better borrowers” ​​(Cressy and Toivanen, 2001), which may exclude women and ethnic minorities who may not appear as credible in the eyes of financiers. There is certainly evidence that ethnic minorities face difficulties in obtaining finance (Ram and Smallbone, 2001; Ram and Deakins, 1996; Bank of England, 1999). In corporate financial management (Arnold, 2013), financing is believed to present 3 main obstacles that can impede the financing process of an SME. These are said to be the information asymmetries between small businesses and financiers or other investors, the underlying risk associated with small-scale businesses and the transaction cost associated with managing SME finance. Berger & Udell, (1998) stated that high-risk, high-growth firms whose assets are mostly intangible obtain external capital more often, while relatively low-risk, low-growth firms whose assets are mostly tangible ones more often receive foreign debt. Studies conducted by authors such as Binks (1992) and Deakins and Hussain (1993) have focused on imperfect information within credit markets and the impact of asymmetric information on small business lending. In contrast, Berger and Udell (1998) identify that small businesses are generally not publicly traded and therefore are not required to release financial information on Form 10Ks (annual reports), and their data is not collected on CRSP (Center for Financial Intelligence) tapes. Stock Prices research) or other datasets typically used in corporate finance research. Data provided by the World Bank shows that "entrepreneurs typically have inside information about their businesses that is not easily accessed, or at all, by potential external financiers or investors." (InfoDev, World Bank, 2004) This leads to two problems, the first concerns the lender or investor who is not aware of the risksrelated and the real value of the investment. This could also lead to financial difficulties as potential loans will not have a sufficient rate due to information asymmetry resulting in a high risk portfolio for the lender. However, Kon and Storey (2003), for example, found cases of potential borrowers who can offer perfectly reasonable business proposals but who “do not apply for a bank loan because they believe they will be rejected”. Second, “once financiers/investors have provided financing, they may not be able to assess whether the firm is using the funds appropriately” (InfoDev, World Bank, 2004). Irwin et al. they also stated that some people have certain characteristics that make them more likely to fail to secure the financing they need, Irwin, et al., (2010). To further address this problem, bankers could avoid financing an SME and adopt cautious attitudes towards SMEs. InfoDev, World Bank, (2004) identifies that this problem is seen more in developing countries in small-scale businesses than in large-scale ones due to lack of detailed information or inadequacies in accounting and data analysis. Irwin, et al, (2010) also stated that there is sufficient and easily accessible funding but the proposals are perceived as not feasible, or the applicants are perceived as incapable of achieving the objectives, or there are not sufficient guarantees, and therefore the whole proposal is too risky for banks. From the financiers' point of view, the lack of collateral will prevent them from further financing SMEs. InfoDev, World Bank, (2004) identifies a number of reasons why SMEs are riskier than larger companies. First, large companies have an advantage in the competitive environment in which SMEs also operate, they have a higher failure rate and a more variable rate of return. Secondly, SMEs possess a lower level of capital and human resources in economic activities compared to large enterprises. Third, the problem of inadequate accounting systems, which reduce the level of accessibility and reliability of information relating to management accounting measures of profitability and repayment capacity. The World Bank also states that regardless of risk profile, managing SME financing is an expensive business. InfoDev, World Bank, (2004) The transaction costs of obtaining a loan are (i) administrative costs, (ii) legal costs and (iii) costs related to information acquisition. In the case of smaller loans or investments, it is more difficult to recover these costs. InfoDev, World Bank, (2004). This problem is more critical in developing countries for the following reasons: (i) lack of adequate management information systems in financial institutions, (ii) the underdeveloped state of the economic sector and (iii) the poor state of some public services, such as the registration of property titles and collateral. InfoDev, World Bank, (2004) Finally, Chang Andrew, under the advice of the Federal Reserve, published a paper suggesting that bank consolidation has worsened market failures. Chang, (2016) Equity Finance As stated by Arnold (2013), the financial gap between larger and more mature enterprises and SMEs is covered through various methods of raising equity capital or funds with or without Arnold's stock market interpretation , (2013). For example, private equity funds, venture capital and angel investing. Over the last 40 years there has been rapid development in the private equity sector Arnold, (2013). Also, Bergemannna & Ulrichargue that venture capital is now the preferred funding modality for projects where “learning” and “innovation” are important. They also state that the innovative nature of the projects carries a substantial risk of failure, with only 20% being high-return investments. Bergemannna & Ulrich, (1998) Berger & Udell suggest that financial intermediaries play a critical role in private markets as producers of information capable of assessing the quality of small businesses and addressing information problems through screening, contracting and monitoring Berger & Udell, (1998). The intermediary can also address the risk profile and appropriate valuation of the business, as well as assess compliance and financial conditions to support the business engaged in exploitative activities or strategies. This is achieved through direct participation in managerial decision making by venture capitalists or renegotiation of loan contract waivers by commercial banks. Berger & Udell, (1998) Furthermore, Berger & Udell, (1998) stated that angel investing is often required at a very early stage of the company, while the entrepreneur is still developing the product or business model. Angel finance is indifferent to other methods of raising external finance and is used for direct financing through an equity contract. It is also necessary when starting small-scale production with limited marketing effort. This "startup phase" is often associated with the development of a formal business plan which is used as a sales document for obtaining angel finance. Berger and Udell, (1998). Arguably, angels are willing to inject the required amount of capital without providing financial expertise and control over the company. Wetzel Jr concluded that angels typically provide funding in a range of around $50,000-250,000, lower than that of a typical venture capital investment. Wetzel Jr., (1994). Berger & Udell, on the other hand, stated that, unlike the angel market, the venture capital market is intermediary Berger & Udell, (1998). Tyebjee and Bruno identified the processes like this, they take funds from a group of investors and contract portfolios by investing in informationally opaque issuers. In addition to screening, contracting, and monitoring, venture capitalists also determine the timing and form of investment exit. Tyebjee and Bruno, (1984) and Gorman and Sahlman, (1989). Furthermore, Berger & Udell explained that the minority of companies will be successful enough to go public and the second best solution will be to sell it to another larger company. Alternatively, if a business does not perform well, it may be returned to its original owners or, in the event of bankruptcy, it may be liquidated. Mostly, they focus on earning returns from outperforming companies in the portfolio. Investors who also participate in strategic planning and occasionally in operational decision-making are considered active investors. Berger & Udell, (1998) Venture capital typically arrives at a later stage to fully support the enhancement of marketing and production processes. When product development costs are substantial, venture capitalists can inject funds in exchange for equity, for example by financing clinical trials or the biotechnology industry Berger & Udell, (1998). The negative attitude towards equity financing The following paragraph refers to the reluctance of companies to cede control of the company to external parties. InfoDev, World Bank, (2004) Bergemannna & Ulrich, (1998) found a simple model.