Small and medium size businesses generally comprise about 65% of the world’s business organizations generating approximately 60% of the total revenue collected by economies in this world. This gives me the notion to hold a postulate that small businesses run about 60% of the world economy (Birch, 2007).
Looking at this general term (small businesses) I would define it as a type of business enterprise which has a capital base which is contributed by only one person or a few individuals. This type of business does not have any legal recognition. As a result, these business units are faced by a great deal of obstacles in obtaining capital to widen their operations. This is one of the main reasons why most of small businesses remain small all through their lifespan (Birch, 1987).
Another body or section in the economy which has come to the aid these business units is the banking sector. In most of the countries, most of the banks have a unit specially operated to cater for small businesses so as to help them thrive and grow probably to levels which will make them be termed as big businesses. From a general perspective, banking sector itself is much reliant on the small businesses since they are the majority in the world of economics. This indirectly shows that banks and small businesses work hand in hand.
In this study, some aspects which might be affecting the continuity of the business may include: planning, financing, control, opportunities and other aspects of SWOT analysis. However, to have a clear picture on what we are dealing with, we will model continuity (f(x)) to vary only according to financing. Since financing may be from various sources, this function will be modeled further to vary according to bank financing only from banks (x). The other factor which will be considered to affect this function is government influence (g). Mathematically, this function can be expressed as.
Looking at government influence and banks impact, a lot is exhibited. The banking sector seems to have realized the importance of this sector of the economy which in most cases fall under private investments. They have started funding the projects making it possible for the economy to expand and generate more revenue. The government has also recognized the sector and appears to have a better influence towards establishment and running of this sector.
In a quantitative research carried out in America, about 65% of the American population relied in small and medium enterprises for their livelihood. This is a clear indication that small business units are of utmost importance to the people of America. From a qualitative perspective, these business units have very high quality products and services partly due to the fact that almost everything is personalized. Services are also customized according to the requirements of the client in need of the services. In a market survey carried out in Florida in 2001, it was found out that the quality of products from small business units was far much better than that from large business units (Jeff, M. 2003).
Impacts of banking in small businesses
1. Provision of credit facilities. In most cases, small business owners make their investment with strategic plans on expansion but due to limited resources, the businesses take long to grow. In the recent past, these business units have called for attention from banking sector which in turn has came up with special credit facilities package specifically for these units. These units have been introduced to enable the entrepreneur acquire the required capital to start and run the business without any financial problems. Also, most of these packages do not have attached strings and long legal procedures like provision of security assets for one to acquire a loan from the bank. Closely related to this are the reduced rates of interests levied on such credit facilities. Taking an example from a rapidly growing bank in Eastern Africa, Equity bank, and the interest rates levied on business loans are less than 4% per annum. This would mean that the business person interested in securing a loan can easily do so and repay at flexible rates. This has impacted greatly on most businesses positively making them to develop into big enterprises which can stand on their own feet and be called limited liability companies with abilities to secure multi-million loans by their own names. The provision of these credit facilities has also created a competitive and innovative small business environment since every person can secure capital to start and run a business without having to surrender any legal document as a security (Roberts, 2009).
2. Provision of investment advice. In most banking sectors of the world, investment advice department is available. The only problem in the past was that the department mainly concentrated on large investments ignoring the simple business units by opinion due to the little profits they earn. After the revolution in business investment strategies, banks expanded this department to cover even the small businesses. By offering the necessary advice on investment, the banking sector helps small business units to operate professionally and manage their resources well. This has resulted in increased profit margins and ability of the business units to stand on their own feet. As a result, small business units have gradually expanded and developed to have more returns on sales compared to some large business units (US secretariat, 2001).
3. Inclusion of youth and women enterprise funds. Women enterprising came to be well established after the famous Beijing conference which saw women receive equal treatment to men in all sectors. Formerly, men were dominant in the banking sector making it possible for them to secure loans compared to women. After this conference, banking sector also changed with the change which saw more women in the sector. In most societies, women are not dominant in the public sector thus they opt to start their own small businesses to generate revenue for their own use (nnovation.gov.au/smallbusiness/Pages). Though a lady may have a great investment idea, there is a common propaganda that women are not independent in business matters making such lady despair in her plan. To ensure that the plan succeeds, the banking sector came up with women enterprise funds which can be loaned to women in business. This has heavily impacted on small businesses since most are owned by women. They can now easily expand and secure more loans for their own flourish. Closely related to this are the youth enterprise funds. In most banks, youth enterprise funds are available for youths who are mostly asked to form investment groups. In these groups, they are taught on how to invest and after investing how to maintain the investment to ensure that it has become beneficial (Roberts, 2009).
4. Longer repayment duration. Looking into the banking sector, the sector has uniformly decided to extend business loan repayment periods by almost 1.5 times the repayment period for normal loans. As a result, small business units have become boosted and encouraged to take the available loans to better their capital base. This has increased the flexibility and affordability of the small business to access the financial resources.
5. Training and follow up activities. In most cases, banks offer advice and training on its clients on investments. Considering the fact that most of the clients are of medium earnings and can only afford to run small business units, the banks play a vital role in the business industry. This is what can be linked to the ability of the business units to thrive and expand to limits beyond the obvious (US secretariat, 2001).
Turning to the governments, a lot of effort has been witnessed from the side of the governments so as to boost the small business units. This has been due to the realization of the governments on the many ways in which small and medium size enterprises have impacted towards the development of the national economies. Therefore, the governments have come up with strategic plans on how to encourage the people to start and run these businesses. In the plans, some of the following core values are present.
1. Encourage the people to start and run small businesses as a form of employment instead of waiting for a formal employment vacancy.
2. Improve on quality offered by the small businesses through training.
3. Promote initiation of business entities to venture in areas less invested so as to increase diversification and reduce competition. (Heine, 2006)
Some of the several ways in which the governments have made their positive impacts on this sector are detailed below.
1. Reduction of corporate tax levied on these business units. This would reduce the cost required to register a business unit. With the reduced cost, more people will venture in small business units. As s result, the business will be impacted on positively leading to its development (Department of Business innovation and skills, 2010).
2. Improving on access to finance. Looking at the government, it is the one that controls the banks’ lending and interest rates. Most of the governments have decreased the lending rates to banks which have consequently reduced their lending rates for the clients mostly in the specified sector of the economy.
3. Support for those starting up companies. This initiative is mostly evidenced in developed countries like UK and US where an entrepreneur approaches the government with his idea of a company and if the idea can be exploited, the government funds the project. This has greatly impacted on the small business owners who feel that they have great ideas and after approaching the government, they are provided with the necessary materials to start and run their companies (Department of Business innovation and skills, 2010).
4. Establishment of SMEs organizations. This move aims at bringing together the many owners of small business units. The organizations create a forum in which the business owners can air their views and a cross platform for them to talk with the government representatives. This helps in creating a conducive environment for the small businesses to thrive (Department of Business innovation and skills, 2010).
However, in some cases, banks and governments have policies which impact negatively on small business units. On the banks side:
1. Rigid credit acquisition procedures. In most banks, the process of acquiring a loan which is substantial enough to cater for expansion of a small business is long and tedious. This makes most investors discouraged since they are even forced to produce some very confidential documents about the business so that the credit worthiness of the business can be determined. Looking at credit worthiness creates the other problem since most small businesses operate on informal basis and their assets are the assets of the business owner. This makes these business units stand no chance of securing large capital base by loans from banks (Stacy, 2003).
2. Lack of consideration of some investments ass business units. This has been witnessed in some areas of America. For example, a person wishing to start a carwash is not likely to secure any loan from a bank. This is because most banks do not recognize setting up a carwash as a business activity which can generate any revenue recognizable by the bank. Another example is hawking (Edison, 2006).
Looking at the government itself, most of the negative impacts on small businesses come from it. Some of these impacts are outlined below.
1. In most countries, it is mandatory for any business activity to be registered. This makes even the lowest earner in the country to pay tax to the government through registration fee. Taking it as an example, a hawker will be required to pay for the trade license which is okay. While in the actual business, the city council comes by and requests the same hawker to pay a daily fee. This makes the hawker to feel oppressed and discouraged. As a result, the upcoming entrepreneur feels demoralized and at the end ceases engaging in the business activity. As a result, even the youth views it as a waste of time trying to venture in business.
2. Long processes of acquiring trade licenses. This comes with the process of centralized registration of businesses. In most countries, registration is done manually and from a central location. As a result, the people scrabble for registration and at the very end, some give. Since it is not legal to operate any business without a valid trade license, the number of people in business drastically drops (Davis, 2011).
Recommendations
Though the government has done a lot to impact positively on the existence on small business units, some areas still need checking and correction.
1. Registration should be done in a digital manner in which once registered, the business person will just be renewing the license online instead of having to queue or visit the city council office in person for registration (United States, 2011.).
2. The government should ask the banks to lower their lending rates and set aside some money from the national treasury to fund the existing small businesses at a subsidized interest rate. This will help expand the already existing companies and formation of new ones.
3. The banks on the other hand should revise their lending procedure and try to create trust in the clients to a point of requesting a few identification documents for a person to secure a loan (Anita, 2012).
In conclusion, the general impact of the banking sector and government on small business units has been positive. If this tread is adhered to, I can see a future in which small business owners will sit on the same ideas discussion table with big business owners and discuss what might help improve the economy.
Roberts N. 2009. International journal of business and management tomorrow: do banks matter to small and medium size businesses in Nigeria? SPIRI. Volume 2, issue 4.
Works Cited
Edison, K, 2006. The Role of Small and Large Businesses in Economic Development, Princeton Press
Heine M, 2006. Investigating the Impact of Firm Size on Small Business Social Responsibility: A Critical Review. Penguin publishers
Birch, D, 2007, Job Creation in America, How our smallest companies put the most people to work, The Free Press, New York.
US secretariat, 2001. The Small business economy, United States printing press
Mitchell, Stacy. 2003, The Multiplier Effect of Local Independent Business Ownership: Supporting Buy Local Campaigns and Local Independent Businesses across North America. Santa Fe Independent Business Report, Rep. Santa Fe Independent Business & Community Alliance
Jeff, M. 2003. The American Independent Business Alliance: Supporting Buy Local Campaigns and Local Independent Businesses across North America, Oxford University Press.
United States, 2011. Small Business Administration: Frequently Asked Questions about Small Business. SBA Office of Advocacy http://www.innovation.gov.au/smallbusiness/Pages/default.aspx
Anita C, 2012. The small business tax: Government regulations, retrieved from http://smallbiztrends.com/2012/06/small-business-tax-government-regulations.html.
Davis N, 2011. Effect of government regulation on small businesses, retrieved from http://www.c-span.org/Events/Effect-of-Government-Regulation-on-Small Businesses/10737423141/
