CQ 1: How can small businesses attract finance?
11 important questions on CQ 1: How can small businesses attract finance?
What are 4 key differences between finance for large and small businesses?
- Limited liability is absent or ineffective
- Personal characteristics of entrepreneur important (who may, for instance, be overconfident)
- High 'downside risks' associated with business (failure)
- 'Informationally' opaque marketplace (not all information is shared)
What is an informationally opaque marketplace? (2)
- Some information is available to outsiders, but it can be very imperfect
- Highly developed information 'industry' on large businesses
- Large businesses more likely to reflect market trends
- Knowledge about small businesses limited
- Information can be imperfect (sometimes on purpose)
- Focus on the entrepreneur
What are the key sources of finance? (3)
- Debt finance
- Equity finance
- Crowd funding
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What is asset finance? (2)
- Leasing
- ownership of the asset always remains with the owner (lessor) rather than the business (lessee)
- Hire purchase
- business owns the asset ('rent-to-own')
What is asset based finance? (3)
- Factoring
- selling invoices (sales not yet paid) to a third party (a 'factor') in return for a proportion of the yet unpaid invoices
- Invoice discounting
- borrowing against unpaid invoices
- Stock finance
- borrowing against the stock a business holds
What are 3 aspects for debt financing?
- Evidence on the opacity of the market for small business loans (debt financing)
- How banks deal with this opacity
- How small businesses deal with this opacity
What are 5 features of opaque markets for loans?
- Need for collateral
- Evidence on 'credit constrained' entrepreneurs
- Discrimination (e.g. minorities, females)
- High interest rates
- Better terms for better lenders
What is meant by 'interest rates for small businesses'?
What are 3 points of perspectives of banks about debt financing?
- Overcoming information asymmetries
- Enforcing the entrepreneur to pay back
- Limiting failure costs
- ways to get money back after failure
How can collateral be an imperfect asset? (3)
- Asset realisation may depend upon economic situation
- Transaction costs
- Negative publicity
What are points of perspective of small businesses of debt financing? (5+1)
- Information
- business plan
- Collateral
- Third party cover
- Entrepreneurial talent
- expierence
- Relationship factor
- Group lending or mutual guarantee scheme
The question on the page originate from the summary of the following study material:
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- Never study anything twice again
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- 100% sure, 100% understanding
