ABSTRACT
The global financial crisis has highlighted the vulnerability of small businesses1 in economic downturns, particularly in relation to access to finance. It has become clear that, at such times, the law of credit and security does not enable small businesses to find effective solutions.2 This is problematic in light of the role of small businesses in economic growth and social renewal at times of economic crisis. The limited availability and the cost of credit make small businesses vulnerable to market uncertainties caused by financial crisis.3 Finance to small businesses is generally refused on the grounds that they are new to the market, insufficiently profitable or cannot provide acceptable collateral. Small businesses present certain distinctive problems for lenders in terms of lending. These challenges include low capitalisation, small size, varied profitability and growth in the market, problems of information asymmetry and monitoring (difficulties with differentiating the financial position of business from the owner’s financial standing), low credit rating, relatively weak bargaining power, dependency on external finance and credit (which becomes acute at times of recession and financial crisis), and inability to access financial markets.4 Research conducted post 2008 financial crisis has revealed that banks’ criterion for lending is based on the size of the firm, which indicates that micro-businesses (0-9 employees) have been most vulnerable to access to finance. Furthermore, it was also pointed out that the demand
affected 119,000 small businesses where credit was denied. However, there is a justifiable widespread view that facilitating small businesses’ access to finance may support economic growth6 and contribute to social mobility and renewal. The failure of small businesses may not only have individual consequences (e.g. personal bankruptcies of employees and members of businesses) but also universal repercussions (e.g. failure of economies and decline in economic growth).
