These research works aimed at examine the problem of financing the small and medium scale enterprises (SMEs) in Nigeria. The problems observed in the research work was that government should not involve in commercial and industrial enterprises, and also government should make favorable acquisition and allocation of funds to small and medium scale enterprises in Nigeria.
For the purpose of providing theoretical frame work and back-ground for the study, the researcher reviewed various literatures such as books, magazines, journals and unpublished past projects which directly related to the research work. Furthermore, a structured questionnaire was designed to collect data based on the review. . The role of government and financial institution, in the growth and development of the enterprises in Nigeria has not been encouraging in terms of capital.
Furthermore, keeping of financial records and maintain control would enable us to analyze performance and efficiency of production, to justify the use of fund and the ability to pay back and it would reveal the danger of high interest rate.
Base on the outcome, I therefore recommend that Nigeria government should intensify efforts in the growth and development of small and medium scale business by making adequate capital available and also making sure that the financial institutions comply by the directive given to the by lending at favourable minimum interest rate.
Furthermore, I recommend that adequate attention should be given to them (SMES) so that the benefits such as human, material and society development and unemployment reduction can be fully achieved.
1.1 BACKGROUND AND KNOWLEDGE OF THE STUDY
Financing Small Scale business involves the establishment and maintenance of business ventures. It will be ideal to make a brief analysis of what small scale business involves.
This ranges from services to manufacturing and repairs. One distinctive feature of small scale business is the capital adequacy which must be within the required minimum as required by the Company and Allied Matters Act of 1991 as amended and other legal requirements governing and regulatory various forms of business. Example, Bank and Other Financial Decree 1991 (BOFID) and Insurance Decree 1991.
v Service Venture: This encompasses professional services such as, Accountancy, Secretariat. Legal Services, it may also include liquidate and receivership, management constancy to mention but a few.
v Manufacturing Venture: This involves production of goods for local companies which may also involves the production of local equipment’s like form implements and machinery.
v Repairs and Maintenance: This plays a predominant role in the survival of both the repairs and maintenance plays a predominant role in the survival of both the large and small scale businesses. This ranges from the auto-mechanic and hi-tech maintenance, officer automation maintenance and repairs are not left out. The gathering pace of industrialisation in the North America and Western Europe in the early 19th Century, which had manifested to a gigantic venture, which the whole world cannot dare. In perspective is the Cable News Network (CNN) established by TED Turner in the United State of America, which started with about $5,000 Operating within a mini block of flat in the early ninety, could hardly manage the whole of the earth for its operations due to the rate of US expansion.
Growth in Nigeria Small Scale business has a restricted. Immediately after independent, the orientation of people towards work and earning a living with diverted to secure employment with the government or in the private sector; people were not encourage to establishing their own business and farming ventures were mainly subsistence.
Lack of education and enlightenment from the government is assured to have caused this problem. In the recent past, the unfavourable economic problem, which could be partially linked to the unstable political situation, stand as the major obstacle for the establishment and survival of the small-scale business and it has also brought about retarded growth to the existing ones.
The problem of unemployment and the need for self-sufficiency and self-actualisation necessitate the need for financing small scale business. The main problem for the establishment and maintenance of small scale business is finance. It has been observed that, many prospective investors do not know the types and source of financing available to them and other means of raising funds for the survival of their business. Some of the types of finance available to them are namely.
v Ordinary Share Capital: This type of finance is acquired through the stock exchange market, where prospective subscribers would be members of the company if they succeeded in acquiring the shares of the company.
v Preference Share Capital; This is also acquired through the stock market, in this security will be entitled to a fixed interest on their capital if the company makes profit except for cumulative preference share where the interest will be in accumulation until the company makes profit.
v Debenture Stock: This is a kind of loan to the company, which carries a fixed rate of interest they can be redeemable or irredeemable as the case may be.
v Loans and Overdraft: this may be acquired from the Banker to the Company; it helps in the maintenance and survival of the business.
v Ploughing back of profit: this is a situation where profit of the last accounting years is reinvested into the business in order to expand the financial base of the venture.
v Asset Leasing: This is of two types, the first one involves operating lease where the ownership will be rested on the lessor, which the lessor will have the final possession after the completion of the payment. The second one is the finance lease where the ownership and maintenance of the asset is rested with the lessee, only the lessor will be paying the finance charges periodically.
v Hire Purchase: this helps the compound to acquire assets where the arrangements the company can now spread the paying for the asset over some periods of time.
v Purchase Arrangement; this involved purchasing on credit from customers.
1.2 STATEMENT OF THE PROBLEM
It will be pertinent to emphasise the problems that could be encountered in the study. This stem from the definitions of what one could be describe as a small scale business.
The terms Small Scale Business could be said to be ambiguous or subjective. It depends on the perspective from which one is looking at it. The government itself has not given a specific definition. Definition also varies from one Bank to the other (Commercial and Merchant Banks) even within a bank itself there has been diverse definition. A definition given by the Corporate Finance Department is quite different from that given by Loans Advances Department. The factors, which could be responsible for the variability, could be traced to inflation, time and market forces.
Small scale business financing could be the financing of a new project or provision of capital for an existing company. It could be floating of an entirely new business venture.
In case of a project that would be embarked upon for expansion purposes, one would have to determine its impact of the effective performance of the firm.
Furthermore, in case of a new business venture, one will need to show how feasible and viable the venture will be by making available the feasibility report, projected cash flows or the estimated profit and loss account.
The most important of all these problems however, is that of finance. In deed, it could be rightly said that all other problems facing small scale project emanates from lack of finance. Small scale projects are usually faced with the problem of where to obtain funds, whether commercial banks or merchant banks or other specialised financial houses.
It should however be noted that the funds required for a particular project could be raised from various sources. If this happens, a situation of capital mix is said to be in existence. Since each sources of income has their associated costs, which will be different from other source, and where there is capital mix, the company should ensure that they obtain the best possible combination of the various sources of capital.
Another feasible problem is that of collateral and high interest rate in securing the needed finance. All these problems would however be dealt with in the main text of this project.
1.3PURPOSE OF THE STUDY
The purpose of this study is to evaluate the various sources of finance to small and medium scale enterprises and its impact on economic growth and development.
RESEARCH QUESTION AND HYPOTHESIS
It is known that small scale business finds it difficult to raise funds, this form part of the basis of this research study, and the economic implication of finance to small scale business.
However, I shall within the scope of this study test the following hypothesis;
v What are the sources of fund to the SMES.
v When finance is provided for small
v scale business, what effect does this has on employment generation.
v What effect does activities of small scale business has on total output of an economy.
v Does financing small scale business in an economy lead to increase in income of other sector of the economy.
v What type of fund weather long, short, medium is available to the
v What impacts the fund soured on: input utilization in the economy,
Linkage within the sectors.
1.4 SCOPE OF THE STUDY
For an adequate discussion to be made on the issue of small
Scale business financing, it is important to explain the definitions of
Small scale business; a source of finance, the government polices as well as build a model to explain its impact on economic growth.
Restriction shall however be made as stated above to small scale business whose total fund needed not exceed two million, five hundred thousand Naira (N2.5m) either in floating a new business venture or for expansion of an existing business. A general equilibrium model would be used for the analysis.
1.5 LIMITATION OF THE STUDY
In this, I will limit myself to business whose total costs do not exceed two million, five hundred thousand Naira (N2.5m). Another limitation could be data because most finance has might not be favourably disposed to information dissemination. Anytime, we will rely mostly on secondary data for CBN and FOS.
1.6 DEFINITION OF TERMS
v FINANCING: This is the act of raising money necessary to organise, re-cognise or extend an enterprises, whether by the sales of stocks, shares, bonds, notes and otherwise.
v PROJECT/BUSINESS FINANCING: This term is used to describe a variety of financing arrangement for individual investment business. Often, a separate legal entity is formed which owns project for repayment of their loan or for the return on their equity small scale business. These are business whose total assets do not exceed two million Naira.
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