TEAM INSTITUTE OF BUSINESS MANAGEMENT

COURSE: PAPER: LECTURER: PROGRAM: NAME: INDEX: DATE:

Bachelor Business Administration Business Finance II Mukisha Michael BBAX TABU JOSEPH 11/8/TM/171/BBAX 30/11/2011

QUESTION: a) Discuss the various sources of finance available to Small and Medium size Enterprises (SMEs) in Uganda. b) What are the challenges faced by SMEs in Uganda sourcing finance for business development.

There is no single universally accepted definition of SMEs but many vary according to regional, the most recent and applied definition is by the European Union which categories SMEs using the number of employees and turnover into mid-sized (less than 250 employees and turnover of between 43 to 50 million pounds), small (less than 50 employees and turnover of 10 million pounds) and micro company (less than 10 employees and turnover of 2 million pounds). However, Uganda defines and classifies SMEs into micro businesses with less than five employees and small business as having less than Ush. 50 million in annual turnover and capital, and the same applies to mid-sized businesses with less than 250 employees (Uganda revenue Authority; Uganda Investment Authority; Ugandas Top 100 mid-sized companies survey, 2009). In Uganda today SMEs are a key engine for the nations development. In particular, the majority of them (more than 90 per cent) are, providing jobs through which people can acquire skills and generate income, and also contributing to two thirds of national income and have proved to be a powerful force for poverty reduction and the foundation for a middle class. Uniquely SMEs have diverse sources of finance to capitalize there business operations are either through formal and informal sources, and some of the informal sources include; The main source that research provides is the tradition owners equity source and (56% of SMEs UIA report 2009) especially the small scale enterprises start up through owners equity. An internal source of finance to most SMEs, especially in financing growth of the enterprise is the Retained earnings which is reinvested back to the business. SMEs mostly rely on this source since most SMEs are in rural location with limited alternative source to finance. There is also increasing angel investor (also known as a business

angel or informal investor ) source of finance to SMEs especially in Urban set ups, where an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. A small but

increasing

number

of

angel

investors

organize

themselves

into angel

groups or angel networks to share research and pool their investment capital. Another common source of SMEs finance is the trade credits, where they negotiate with suppliers (e.g. whole sellers, manufacturers) for credit supplies in into the business. The current financial crisis highlights the importance of trade credits for short-run financing of small and medium-sized enterprises (SMEs). It shows that even healthy SMEs may run out of bank credit and may have to rely on other sources of short-term financing, like trade credit, to overcome financial constraints or to avoid bankruptcy. There is a growing notable source where families and friends help in financing an enterprise. The growing Indians business enterprises are the common examples of SMEs that have grown on the basis of funds source with family and friends. Eg House of Dauda Business.

And here are some of the formal notable sources of finance to SMEs; Insurance Premium Financing (IPF) facility, which is designed to enable SMEs to meet their insurance premiums promptly and spread the repayments within 10months. This is a notable initiative by DFCU Bank. Leasing facilities, a lease is a contract between an owner of equipment (the lessor) and another party (the lessee) giving the lessee possession and use of a specific asset in return for payment of specified rentals over an agreed period. The lessee selects the equipment and the lessor purchases it for the formers use. The benefits of leasing include: Medium-term finance, providing an alternative to traditional credit. Bank loans are the most profound finance source and there have been general efforts from all stake holders including government in designing program and policies to increases SME access to bank loans, which is the most important institutional source of finance for SMEs seeking loans.

In conclusion, SMEs generally do not have a single outlined and uniform source of finance and a series of factor like location, size, type of the business are major in determine the finance source. And the source of financing suitable for SMEs is still insufficient, and this results in limited growth and survival of SMEs.

The sustainable growth of the Ugandan economy is directly related to the rate of SMEs creation and development. This in turn depends on the ease with which small- and medium-sized enterprises (SMEs) can be started and financed, given their large contribution to the national economy. Some of the critical constraints facing Ugandan SMEs in sourcing for finance have been widely acknowledged to the following;

Uganda's banking sector has a history of high default rates, discouraging banks from lending to local SMEs that are known to have higher risks and transaction costs. At the same time, there is fierce competition among banks, donors, international financial institutions and investment authorities for bankable and/or fundable projects. In the same line with also most of the SMEs lack suitable collateral securities that convince banks in acknowledging lending to them (SMEs). They mostly operate in hired structures; some even do not have operating licenses and registration documentations. To add on access to bank lending is lack of record/book keeping systems of the business; and yet this is a pre-requisite in securing bank loans and most trade credits. While insufficient domestic savings is often mentioned as contributing to the lack of financing for SMEs, the Bank of Uganda reported that there was in fact sufficient liquidity in the banking sector. This was confirmed by commercial bank representatives, in whose view the real problem was a lack of bankable SME projects and a lack of creditworthy SMEs.

Due to modernity in Technology, SMEs have limited or lack of investment in Information Technology, and yet this is the trend of prosperous business in the developed world today. SMEs lack diversified range of business opportunities and also have limited knowledge of business opportunities most of them operate on one product outlay over a life time, this reduces the profitability opportunities that are even used to fund back the business.

Most SMEs start and dies of after a short while they generally have slim chance of survival due to small size and poor product quality in the fierce competition of globalization which large scale Enterprises meet. There fore, potentialities in sourcing for finance are deputed. In conclusion SMEs must be part of the development equation. In emerging markets, they are actually the private sector, and sustainable development and employment creation cannot be achieved without them.

INFORMATION SOURCES; 1. Strategies for Growth of SMEs, Margi Levy and Philip Powell 2004 2. Uganda Investment Authority (UIA), Top 100 SMEs survey report 2009. 3. UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT; PROCEEDINGS OF THE SYMPOSIUM ON MODALITIES FOR FINANCING SMEs IN UGANDA, New York and Geneva 2002.