Corporate finance for SMEs : alternative finance comes of age

Abstract

We come across aspiring entrepreneurs who have excellent business propositions but lack the funds to kick start their enterprise. We also come across small businesses struggling to take their business to the next level simply because they fail to secure the necessary funds to invest in their business. Traditional forms of financing through banks has become scarce for SMEs as banks have increasingly adopted a risk-based approach when it comes to financing businesses which struggle to make up the required collateral. This study will evaluate the two alternative financing methods used in financing SMEs (Small and Medium-sized Enterprises) in Europe and in Malta. The dissertation highlights the main features of external financing techniques alternative to the traditional method of borrowing straight debt from banks. It will focus on two popular alternative sources of financing used by SMEs in Malta: crowdfunding and capital Markets. Crowdfunding is one of the methods available to SMEs which has come about with the proliferation of the Internet. It allows businesses to place their idea on a platform and give small investors an opportunity to participate in this venture. In crowdfunding, hence the term, monetary contributions are raised from a large audience, normally raised through an online based intermediary. By raising small amounts of funds from a large number of investors SMEs are able to raise the same amount of funds required to meet their business objectives. Crowdfunding is highly correlated with the concept of crowdsourcing which is the outsourcing of specific tasks used by large audiences known as “crowds”. Capital Markets consist of initial public offerings (IPO’s) that Smes undertake to increase their capital funds by publicly listing the company’s equity or debt securities on the stock exchange for more exposure and generate more income through the issuance of their company’s shares or bonds. This study will highlight these two funding methods that can be undertaken by SMEs which rival straight debt from banks. This thesis also includes primary research consisting of interviews with the concerned organizations to further back the research.