2.4 D ETERMINANTS OF E NTREPRENEURSHIP WITHIN THE CONTEXT OF SME DEVELOPMENT
2.4.2 Access to Finance
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of more than five (5) percent (Storey and Greene, 2010:377). This factor shows that the environment in which regulatory frameworks are to be implemented is equally important as the regulatory frameworks themselves. In this case political stability is a contributing factor to the rate of start-ups thus regulatory frameworks need to be accompanied by a conducive political environment. China promulgated the SMEs promotion law in 2002 which saw the removal of institutional barriers that hinder the development of SMEs and creation of a level playing field for SME development (Chen, 2006:140). China is, therefore, a good illustration of the yields and rewards of government influencing the regulatory environment in an effort to develop small businesses.
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Despite being recognised as being the key to economic growth the SME sector remains grossly underfunded and unsupported (Mashanda, 2012:20; Berg and Fuch, 2015:2). Access to finance for business ventures should be made easier in order to realise the most out of small businesses.
Harrison and Baldock (2015:2) argue for the need for a more coherent public policy approach to address the SME financing issues. In this light therefore SME policy is an important initiative that can resolve the financial challenges that are faced by SMEs.
Mudavanhu et al. (2011:83) in their study of the determinants of Small and Medium Enterprises failure in Zimbabwe point out that in a study across 11 African countries, nine confirmed that the cost and availability of credit is a major factor that affects SME development. Karedza et al.
(2014:39) also note that the same problem exists in Zimbabwe where the cost of financing in terms of interest rates has been cited as one of the major challenges facing SMEs. Small businesses are viewed as high risk profiles and as such are charged with higher interest rates which increases their operation costs and decreases their competitiveness (Gangata and Matavire, 2012:2). The growth of SMEs is thus stunted by the cost of interest rates on loans. Therefore, it is important to have SME policies that lessen these costs so as to encourage the growth of SMEs.
Blackburn (2012:9) argues that market failure exists because a financial institution’s decision to lend is based on collateral and track record rather than the economic viability of the business.
Although small businesses might be viable the lack of a track record and collateral acts as an obstacle to raising the adequate funds. Gombabrume and Mavhundutse (2014:104) in a study on the challenges faced by Small to Medium Enterprises in Chitungwiza assert that SMEs find it difficult to meet stringent demands set by financial lenders who often demand collateral security.
The Zimbabwe Institute (2007:22) notes that the lack of collateral security prevents SMEs from having access to capital. Addressing the problems of a track record and collateral is therefore important for government so that the potential of the small business might be realised.
Nyanga, Zirima, Mupani, Chifamba and Mashavira (2013:145) in their study of the survival strategies employed by SMEs in Zimbabwe to survive the economic crisis made similar observations arguing that start-ups might have difficulties accessing finance from local banks or face strongly unfavourable lending conditions. In Zimbabwe difficulties in business financing are
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such that SMEs hardly grow beyond the initial stage (Manyani, 2014:11). Government, therefore, needs to influence the financing of small businesses especially in the start-up phase.
This is imperative in an economy where Mudavanhu et al. (2011:82) estimate that up to 60 percent of small businesses fail in the first year. To reduce the failure rate of small businesses in their start-up phase government needs develop intervention strategies that are aimed at lending to SMEs in their formative years.
Size, age and ownership are the most reliable predictors of firms’ financing obstacles; older, larger and foreign owned firms report lower financing obstacles (Beck and Dermiguc-Kunt, 2006:2935; Khan, 2015:186). Chipangura and Kaseke (2012:46) argue that SMEs are most vulnerable in terms of survival because of their newness and smallness. This assertion implies that small and domestic firms stand little chance at accessing finances. Due to their size, small businesses are seen as having more risk of defaulting consequently banks, if they are willing to lend, might lend to SMEs at high interest rates (Chirisa, Dumba and Mukura, 2012:117). Hence the responsibility of government is ensuring that small and domestic enterprises access finance by influencing policy instruments and formulating intervention strategies that improve the accessibility to finance of indigenous small businesses.
Thiam (2007:6) is of the view that the constraints faced by SMEs in their search for financial capital are symptoms of deeper structural problems. Gombarume and Mavhundutse (2014:103) concur that the liquidity crunch in the financial sector meant that SMEs regarded as risky and less attractive to lend to were the most affected. The failure of the economy has worsened the financing of small businesses. Some of these structural problems include the fact that because SMEs are viewed as risky they are offered short term debt (Matarirano and Olawale, 2010:1715).
In order to improve the financing of small businesses there is need to address the whole state machinery to make it more efficient so as to benefit SMEs.
Institutional development is the most significant characteristic that can explain cross country variations in firms’ financing obstacles. Small businesses in countries with higher institutional development report significantly lower financing obstacles than those in countries with lower development (Beck and Dermiguc-Kunt, 2006:2937). Developing institutions is thus important if
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government wants to improve SMEs’ access to finance. Policies that are aimed at changing the accessibility of finances to SMEs as well as those that change the institutional set up of countries should be put in place to enhance access to finances for small businesses. Government also needs to adjust legal and institutional systems in order to mitigate the obstacles of accessing finances.
According to Beck and Dermiguc-Kunt (2006:2940) countries that have more effective and adaptable legal systems have their firms reporting lower financing obstacles. It is thus important for policy makers to review the impact of the legal system on small businesses.
However, it is worth highlighting that availing loans to SMEs should be done under strict monitoring as some of the funds can be subject mismanagement. Bukaliya and Hama (2012:62) in a study of the challenges affecting informal businesses’ access to finance in Zimbabwe note that the informal businesses have a reputation of high indiscipline whereby after submitting a viable business proposal and granted a loan, the informal business operators divert the funds to other personal expenditures. Penalties have to be put in place as a deterrent against the abuse of funds.