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 sect...
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Assessing the capital structure of any firm is important for investors attempting to determine if...
This approach was formed without applying the taxes, but with including the taxes it should be as the following:. The First Proposition with taxes: In this section Modigliani and Miller applied the first proposition approach with taxes, findings to this is that the capital structure directly impacts the firm’s market value, this is because M&M found that firms who have got more debt in their capital structure are more likely to be valuable or have a higher market value than other firms who have only equity, this is because of the tax shield effect which is a taxation system that excludes all the paid interests on the debt.
Unlike the CEOs of major public company whose personal financial situation has little effect on their companies’ borrowing, if you are a small business owner, your personal credit is a major factor influencing your company’s access to capital. The power of personal credit scores to predict small business loan repayment, the legal structure of many small businesses, and small business owners’ use of personal guarantees and personal borrowing to finance business operations all link small business owners’ personal credit to their companies’ access to capital.
Gelo, O., Braakmann, D., & Benetka, G. (2008). Quantitative and Qualitative Research: Beyond the Debate. Integrative Psychological & Behavioral Science, 42(3), 266-290. doi:10.1007/s12124-008-9078-3
Finding the perfect capital structure in terms of risk and reward can ensure a company meets shareholder expectations and protects a firm in times of recession. Capital structure refers to how a business puts its money to “work”. The two forms of capital structure are equity capital and debt capital. Both have their benefits and limitations. Striking that perfect balance between the two can mean the difference between thriving versus trying to survive.
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Ÿ Capital structure/investment - This information is taking from the Balance sheet, but also from the Profit and Loss Account. This is examining the sources of finance the company has used and also looking at it as a potential investment opportunity. There are certain features, which must be present if financial information is to meet the needs of the user. The two most important features are that: Ÿ The information should be relevant to those who are using it.
Research on the Sources of Finance for a Business Firms sometimes need to raise finance for Working Capital and Capital Expenditure. Explain what each is and give examples. · Working Capital (or Revenue Expenditure) The working capital is made up of the current assets net of the current liabilities. It is vital to a business to have sufficient working capital to meet all its requirements. Many businesses have gone under, not because they were unprofitable, but because they suffered from shortages of working capital.
Modigliani & Miller, M&M, (1958) found that in a world without taxes, the value of the firm is not affected by its capital structure, and also that the total return to investors remains the same regardless. M&M showed the
There are two main ways to raise money for a project, growing business, or startup company: debt financing and equity financing. Debt financing includes long-term loans, while equity financing is the process of raising capital through the sale of shares in an enterprise. It is essentially the sale of an ownership interest to raise funds for business purposes. Debt financing allows you to purchase assets before you earn the necessary funds, which can be a great way to pursue an aggressive growth strategy (especially if you have access to low interest rates). Items like mining equipment, buildings, machines, and equipment can all be obtained immediately once a loan is acquired.
There are various definitions of smaller enterprises provided from different times and areas. One of the earliest definitions was provided by Bolton Report (1971), which has indicated that a small enterprise should meet three criteria: independent (not part of a larger enterprise); managed in a personalized manner(simple management structure); relatively small share of the market(the enterprise is a price ‘taker’ rather than price ‘maker’). There are also quantitative definition of the smaller enterprise in terms of measurement of the assets, turnover, profitability and employment from different sectors and countries (Bolton, 1971).