For example small firms with turnover of GBP 50000 are likely to have very

For example small firms with turnover of gbp 50000

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source of funds will depend upon the size of the business. For example, small firms with turnover of GBP 50,000 are likely to have very different capital structure from small firms with turnover of GBP 1M. Another important factor that tends to affect the type of finance employed by a small enterprise is the industrial sector in which it operates. A firm which has tangible assets such as land and buildings that can be offered as security, such as a firm in the property sector, is likely to find it easier to obtain funds than a firm in a sector whose assets are intangible in nature, such a firm in the advertising industry whose main assets tend to be creative, reflecting skills of the personnel they employ. There is a very limited opportunity for small firms to raise funds in the equity markets. The main markets for small business in which to raise fund in the Alternative Investment Market (AIM), but only a very small proportion of small business in the developed and developing countries are eligible listing. In addition, there is some evidence to suggest that a large proportion of owner-managers of small firms are reluctant to seek equity finance from external sources (Cowling et al, 1991; Binkset al 1990b). This reluctance is primarily due to managers desire to maintain his independence and control of the business (Keasey and Watson, 1993). According to Tucker and Lean (2003) one of the problems faced by small firms when attempting to raise finance is information asymmetry in that they cannot prove the quality of its investments projects to the provider of finance (usually banks). Small firm’s managers often suffer from lack of financial sophistication, as they are often product or service specialists, not specialists in the area of finance. Thus, the information asymmetry problem is partly one relating to difficulties in the spheres of communication and 19
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credibility. This is compounded by the fact that new or recent start-ups businesses may be unable to provide evidence of a good financial performance track record. Banks in particular rely on past financial performance as an indicator for the future profitability of projects. According to Titman, Fan and Twite (2003), a principle source of the financial constraints, influencing capital-structure, may be the existence of asymmetric information and the cost of contracting between companies and potential providers of external financing. Problems of financial constraints are potentially high in presence of poorly developed financial system. A well-developed financial system can facilitate the ability of a company to gain access to different sources of finance, providing cheaper finance to worthy companies (Guiso, Sapienza, Zingales, 2004) Owing to lack of business experience of many small owner-managers in the early years of the business, business risk may be more significant than large firms. Small firms generally have smaller financial reserves to draw on in times of crises and are also relatively highly geared compared to larger firms due to the difficulty and expense of attracting new equity finance. Thus, such firms are characterized not only by higher
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