Capital Insufficiency and Importance to Small Businesses

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Table of Contents

Introduction
Insufficient Capital in Small Businesses
Importance of Capital to Small Businesses
Conclusion
References

Introduction

Small businesses are always grappling with the challenge of insufficient capital, which has limited their growth and expansion amidst challenges of globalization. Mega companies have taken advantage of globalization factors that favor them and encroach into the remotest markets that favored survival of small businesses, hence offering stiffer competition.

Since globalization compels small business to expand and keep in tandem with business dynamics, insufficient capital becomes the greatest impediment that affects growth and development of small businesses relative to large businesses. According to Cavaluzzo and Wolken (2002), economic experts are asserting that insufficient capital is one of the greatest challenges facing the growth and development of small businesses across the world (p.7).

Given that capital is the backbone of any business enterprise, insufficient capital has been always an impediment to growth and development of small businesses. Many small businesses have been stagnating for a long period or growing at a slower pace because insufficient capital prevents them from expanding and developing into mega businesses. Therefore, literature review examines how economic experts view the issue of insufficient capital and importance of capital to small businesses.

Insufficient Capital in Small Businesses

Since insufficient capital has led to underfunding of small businesses, economic experts have been trying to find out if underfunding is a crucial factor that contributes to stagnation of business growth and development or there are other mediating factors. However, apparent factor that causes stagnation and poor performance of small businesses is underfunding.

It is evident that capital is a significant factor in business that differentiates between small and large businesses. Entrepreneurs with a limited amount of capital invest in small businesses; on the other hand, entrepreneurs who have unlimited capital tend to invest in mega businesses. Thus, capital is a limiting factor that defines the size of investment that entrepreneurs can venture. Hosmer (2009) states that, due to the expansive room of investment, small businesses always have deficient capital (p.4).

The need to expand and obtain optimum profits from a given investment demands enough capital, which is always lacking in small businesses. So entrepreneurs of small businesses are grappling with the challenge of meeting customers’ demands as well as competing effectively with large businesses, yet they have limited capital.

As small businesses contribute significantly to economic growth and development of a nation, economic experts have delved into ways of encouraging and improving small businesses. One of the recommendation of enhancing growth and development of small businesses is by making entrepreneurs access loans.

Accessibility to loans significantly determines the size of businesses that entrepreneurs can venture into, since capital is an impediment factor in growth and development of small businesses. Schacht (2010) argues that, large businesses and mega companies have been in a position to access loans and credit from various financial institutions and this advantage has considerably boosted their growth and development in the competitive business environments that threaten the existence of small businesses (p.4).

Basing on the fact that large businesses are accessible to loans and credit from financial institutions, which have made them prosper, it thus follows that enhancing accessibility small businesses to loans, and credit will boost their growth and development.

Luetkenhorst and Geiger (2004) argue that, small businesses make a significant contribution to economic and social stability of a nation; hence, policies that enhance their accessibility to loans and credit from financial institutions are imperative (p.9). Therefore, governments need to streamline restrictive and discriminative policies that prevent entrepreneurs of small business from accessing loans and credits.

Economic experts envisage that, equal access of loans and credit by all entrepreneurs provides a level ground that does not disadvantage small businesses relative to large businesses. Financial institutions and other credit institutions have been discriminating against small businesses because they do not have collateral security that would guarantee repayment of loans.

In contrast, leading businesses have well established investments that financial institutions can rely on as collateral security. Hence, in accessibility of loans and credit has been subject to nature of collateral security that entrepreneurs possess. Disparity in collateral security that small and large businesses offer when borrowing loans indicates differential growth rate of the two businesses.

According to Kappel and Ishengoma (2008), the rate of business growth is directly proportional to the rate of investment (p.7). Thus, small business have a low rate of investment due to limited access to loans, which hampers growth and development, unlike large businesses that have unlimited access to loans.

Therefore, economic experts are recommending that small businesses should have access to loans for them to solve the problem of insufficient capital that seems to cripple business progress.

Research carried out to study growth and development of businesses has shown that the process occurs in five stages. At the first stage, the business viability entirely relies on the amount of capital invested in it. For a business to survive and pick up well, it must have sufficient capital.

Existence stage is the first stage that determines whether a business will survive or not. At this stage, business is grappling with challenges such as capital and expanding market share. Kitching, Smallbone, Xhenet (2010) argue that, although customers may increase due to prevailing market conditions, capital becomes a limiting factor that affect the expansion of business to satisfy increasing number of customers (p.3).

At existence stage, an entrepreneur entirely rely on invested capital as a driving force of business since there are no formal strategies and the owner solely run the business. Churchill and Lewis (1983) argue that, entrepreneurs usually close their businesses at existence stage due to insufficient capital for expansion (P.4).

Since entrepreneurs are sole owners of small business, they feel exhausted to spend time, energy and a vast amount of capital, and thus quit establishing business at early stages of business growth. Therefore, it means insufficient capital is a serious impediment to the establishment and development of small businesses.

Although many economic experts argue that insufficient capital is a significant factor that determines survival of small businesses, some economic experts argue that other factors that contribute considerably to growth and expansion of small business exist. For instance, size of market share that small businesses serve determines their growth rather than the amount of capital invested.

The argument is only true if customers are limited, but in competitive markets where customers are many, amount of capital, which an entrepreneur invests in certain business, determines its competitiveness and subsequently its growth and development.

Hence, Osei (1998) argues that, enhancing accessibility of loans and credit to small businesses is central in stimulating economic growth of a nation (p.9). Small businesses contribute to economic growth and development because they contribute a considerable amount of taxes and create employment to a large number of people. Thus, formulation of policies and laws that enhance accessibility to loans is critical in boosting growth and development of small businesses.

Importance of Capital to Small Businesses

Capital is particularly crucial in small businesses because it does not only determine growth and development of a business but also extent of satisfying customers.

For an entrepreneur to start a business, capital is the most decisive factor that comes into consideration. This means that amount of capital that an entrepreneur start business with reflects viability of a business. Investing a small amount of capital implies that a business will have a low viability while investing a prodigious amount of capital shows enhanced viability of a business.

Smallbone (2005) argues that, the only way of boosting growth and development of small businesses is by improving accessibility of capital (p.13). Many small businesses have been stagnating for years due lack of sufficient capital that would have enhanced expansion. In contrast, since successful businesses can easily access capital, they have experienced tremendous growth and development within a few years. Thus, capital is a fundamental factor that defines destiny of business.

Insufficient capital affects growth and development of small businesses. Study carried out to ascertain concerns of entrepreneurs who own small businesses showed that insufficiency and inaccessibility of capital was an impediment factor that caused stagnation in businesses (Peek, & Rosengren 1998, p.806).

Entrepreneurs of small businesses perceive that they would have made significant progress in business if only they had all capital they needed. Comparative study of large and small businesses shows that the differential growth rate between the two entities is due to the invested capital and accessibility of loans.

Blanchflower, Levine, and Zimmerman (1998) argue that, small business entrepreneurs have been experiencing discrimination since lending institutions perceive them as having limited collateral security relative to large businesses; thus, large businesses access enormous amount of capital as compared to small businesses (p.8). Therefore, economic experts have been advocating for extension of loans to small businesses, so that they could compete effectively with large businesses, for capital is an integral factor in business.

Realizing the contribution of small businesses to economic growth and development, Small Business Administration of United States has recommended for enhanced access of capital to all entrepreneurs. According to Walter (2009), the Small Business Administration has taken several initiatives such as enhancing access to capital and reducing taxes as a way of promoting growth and development of small businesses (p.144).

It is apparent that large businesses have been having a competitive advantage over small businesses because of accessibility to capital; however, increased accessibility of capital by small businesses is going to provide a level field where businesses can compete equally. Therefore, if a country needs to boost its economic stability in view of globalization, accessibility of capital should not be a factor that limits growth and development of small business.

Conclusion

Growth and development of businesses depends on the amount of capital invested. It is evident that large businesses grow and develop faster as compared to small businesses because of the amount of capital. In this view, economic experts perceive that small businesses have been stagnating for years, for they do not have sufficient capital that is essential for expansion.

Moreover, for decades, financial institutions have been discriminating against small businesses because they do not have enough collateral security to qualify them for loans.

However, realization by various governments that small businesses contribute significantly to economic growth and development has led to the formulation of laws and policies that aid small business to grow and develop amidst competitive environment dominated by large businesses.

Lending institutions, too, have been encouraging small businesses to borrow loans after realizing they are forms of lucrative investments just like giant businesses.

References

Blanchflower, G., Levine, P., & Zimmerman, D., 1998. Discrimination in the Small Business Credit Market. National Bureau of Economic Research, pp. 1-11.

Cavaluzzo, S., & Wolken, D., 2002. Competition, Small Business Financing, and Discrimination: Evidence from a New Survey. Journal of Business, 75(4), pp. 1-23.

Churchill, N., & Lewis, V., 1983. The five Stages of Small Business Growth. Harvard Business Review, pp. 1-12.

Hosmer, L., 2009. A Venture Capital Primer for Small Business: Financial Management Series. United States Small Business Administration, pp. 1-15.

Kappel, R., & Ishengoma, E., 2008. Business Constraints and Growth Potential of Micro and Small Manufacturing Enterprises in Uganda. German Institute of Global and Area Studies, pp. 1-29.

Kitching, J., Smallbone, D., & Xhenet, M., 2010. Have Small businesses Beaten Recession. Small Business Research Centre, Kingston University, pp. 1-16.

Luetkenhorst, W., & Geiger, R., (2004). Effective Policies for Small Business: A guide for the Policy Review Process and Strategic Plans for Micro, Small and Medium Enterprise Development. The Organization for Economic Co-operation and Development, pp. 1-110.

Osei, K., 1998. Analysis of Factors Affecting the Development of an Emerging Capital Market: The Case of the Ghana Stock Market. African Economic Research Consortium, pp. 1-81.

Peek, J., & Rosengren, E., 1998. Bank Consolidation and Small Business Lending: It Is Not Just Bank Size that Matters. Journal of Banking and Finance, 22, pp. 799-819

Schacht, W., 2010. Small Business Innovation Research Program. Congressional Research Service, pp. 1-9.

Smallbone, D., 2005. Regulation and Small Firm Performance and Growth: A Review of the Literature. Small Business Centre, Kingston University, pp. 1-20.

Walter, P. (2007). Supporting America’s Small Businesses. Small Business Administration, pp. 143-156.

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