Financing Problems of Small Firms in the Manufacturing Sector: The Australian Case

Abstract

The broad purpose of this study is to investigate the major sources of funds of small firms in the manufacturing sector of the economy and the problems these firms face when attempting to raise finance internally or in the capital market. Not very much is known in Australia about the financial structure of small firms, and what are the specific difficulties, although it is well recognised that they exist. Our knowledge in these areas is based mainly on desk research and characterised by a lack of hard facts. Under these conditions a Government agency like the Small Business Bureau, set up to provide, inter alıa, financial assistance to small firms, will find it very difficult to operate. An attempt has been made in this paper to provide some empirical evidence pertaining to the financing of small business. Our main source of information has been a postal questionnaire survey! sent to a large number of small firms in the manufacturing sector. A summary of our findings is as follows: 1. The main proportion of initial funds was provided by proprietors’ equity. Those firms which had to seek outside funds, especially debt finance, found the establishment difficult. 2. Firms successful since their establishment found it easier to obtain the initial funds, thus indicating the ability of the capital market to determine the more promising companies at the time of their establishment. 3. A surprisingly high proportion of firms rely solely on equity finance. 4. Recently established companies raise less additional funds from equity, largely because low profits restrict retentions. 5. There is a strong desire to retain more profits, especially among private companies which suffer from the existence of the undistributed profit tax. 6. Small firms draw upon a very restricted range of debt finance. This is particularly true for smaller responding firms which appear unaware of the variety of types of debt finance in existence. 7. The major source of debt finance for small companies is bank overdraft and it appears to be used to finance medium-term investments. Young and less profitable firms use their overdraft facilities more intensely. 8. Although trade credit is the second most important source of debt finance, when considered ın relation to trade debt, it becomes a negative source of funds. 9. Equity and debt finance taken together, the sources of major significance are bank overdraft, proprietors’ equity, trade credit and retained profits. 10. The most cited reasons why small firms raise funds, in order of importance, are purchase of fixed assets for expansion, increased holdings in current assets and prevention of a liquidity crisis. 11. The majority of firms do not seek outside advice in financial matters. Those which do, typically the smaller firm, approach the external accountant or bank manager. 12. Firms not often refuse funds offered to them, ıf they do, high interest rates are the main reason. Unavailability of loanable funds, insufficient security and bad credit risk are perceived as the main reasons why funds were refused to firms. 13. Among small firms dissatisfaction with the capital market is widespread and it was more pronounced in the smaller and low profit companies. 14. We could not discern any outcry for Government loans or subsidies, instead recommendations were made aiming at changes in fiscal and monetary policy, better economic management and an improvement in the availability in the existing forms of lending.