May 31, 2020 is a daily online magazine covering small business news. We help entrepreneurs transform ideas and innovations into greatness.

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Sources of Financial Assistance

Written by Samuel Muriithi for Gaebler Ventures

There are different sources of financial assistance for small enterprises and these take the form of institutions that vary in terms of ownership, operations and management. A number of operating handicaps hamper these institutions and small enterprises intending to seek help from them will be prudent to take note.

The different sources of financial assistance for small enterprises provide monies for the purposes of long-term finance/fixed capital, working capital, equity, property leasing, discounting, hire purchase etc.

Small enterprises can seek financial assistance from any of the following sources:

1. Subsidized loans borrowed from particular institutions and meant for the expansion and development of the small enterprise.

2. Participation loans where the government guarantees cover for the lending financial institutions.

3. Direct loans and grants from the government with the funding being meant for capital investments.

4. Financial assistance for small enterprises may also come in the form of special loans meant for working capital.

5. Small enterprises involved in manufacturing and service provision can access fixed capital from hire purchase schemes

6. Possible schemes organized in such a manner that borrowers have their purchases being guaranteed by their suppliers. Alternatively these take the form of trade membership groups where members guarantee one another.

7. Commercial banks also provide financial assistance for small enterprises against instruments including mortgages, collateral securities and/or debenture notes.

8. Small enterprises also obtain monies, especially for working capital, from pawnbrokers, moneylenders and curb markets. The interest rates at these institutions range from rational to high and the loans are mostly provided on a short term basis.

9. Financial assistance can also be sought from industrial estates. These are organizations that have the financial backing of industrial banks and they often deal with small enterprises that for example need to make bulk raw material purchases through importation etc.

10. Specialized/sectoral banks are a viable source of financial assistance for small enterprises. These types of banks normally open counters within development banks.

These financial institutions normally face some operational problems, some of which may have negative repercussions on borrowing small enterprises. A few of these are highlighted here:

1. The four aforementioned types of loan programs normally incur high formative expenses in the form of administrative costs, project preparation and evaluation, disbursement and collection of funds, the monitoring of defaulters etc. These problems typically mean that the programs largely become unable to sustain themselves and in order to recoup their costs the borrowing small enterprises are forced to bear the brunt.

2. Leasing as a source of financial assistance for small enterprises has been known to result in over-mechanization and a pile-up of overcapacity.

3. Some small enterprises that use hire purchase agreements as a means for financial assistance have had to contend with the serious issues of equipment repossession.

4. Small enterprises that seek financial assistance for the sake of additional equity can face possible difficulties when the original management is forced to cede some amount of control.

Samuel Muriithi is a business owner in Nairobi, Kenya. He has extensive international business experience in the United States and India.

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