I.

Article Title: Regional and Spatial Issues in the Financing of Small

and Medium-Sized Enterprises and New Ventures

II. Source: This Article was taken from www.mendeley.com

The Article link is:

https://doi.org/10.1080/00343404.2019.1601174

APA Citation
Elisa Ughetto, Marc Cowling & Neil Lee (2019) Regional
and spatial issues in the financing of small and medium-
sized enterprises and new ventures, Regional Studies,
53:5, 617-619, DOI: 10.1080/00343404.2019.1601174

III. Introduction

SMEs and new ventures (business angel, bank credit, and credit card financing)
play one of the most important roles in our economy as significant contributors to
national income and a growing workforce. But they also need funding for a wide
range of purposes. This includes loans to buy new equipment, funds for working
capital, business expansion, or to cover existing debts and expenses. But even if a
business owner walks into a bank, they will still get around 80- 90% chance of being
denied. This absolutely true especially if he is applying for a loan in a bank located in
a spatial dependent area. Due to the difficulties in getting financial resources, their
potential growth is at risk. It is one of the biggest threats to owning and operating a
business. This article will further discuss how geography affects the availability of
financing options for SMEs and new ventures and their conditional access in the
local banking system.

IV. Summary

Regional differences in the financing of SMEs and start-ups mostly derive

from an uneven geographical distribution of investments, innovation and
entrepreneurial opportunities. For example, huge differences can be envisaged in
the concentration and provision of capital from banks at national, regional and local
levels and in the level of development of the local financial ecosystem. The
clustering of investment opportunities and specialist investors in ‘core regions’ more
than in ‘peripheral regions’ reinforces credit constraints dynamics for SMEs operating
in spatially remote regions which is unequally distributed across cities, regions and
nations. The absence of a florid financial ecosystem with a poorly developed banking
system and the scarce presence of venture capital and business angels financing
has implications for how local SMEs or start-ups are financed, limiting their growth
possibilities.

An increase in the number of bank branches and the entry of new banks are
associated with local labour market improvements and easier SME access to bank
debt. However, the pace of new local firm creation has been stimulated, in the post
financial crisis period, only by the acquisition of commercial banks by aggressive
owners. Although financing remains a key driver of the growth for SMEs and new
ventures, the traditional sources of bank and equity finance are increasingly difficult
to obtain, especially when firms are located in remote geographical areas. Therefore,
regional financial policies should be designed by adopting a more systemic and
hands-on policy approach in order to target better those regions characterized by a
weak financial ecosystem. Moreover, policymakers should better focus on local
effects when taking decisions that influence the structure and health of the financial
ecosystem.

V. Learning or Insights

Business and Finance books and studies that I have read would always
include different tips to help anyone get their finances and plans in order. This
includes tutorials and guidelines on how to get a good credit score, unlimited cash
flows, solid business plan, and long term growth. However, banks' geographical
behaviors are not given much attention. When I think of a bank, I would always
imagine a huge locked door of the vault where they keep a ton of their money. But
that is not the case. In this article, I have learned most of them have a lot less money
on hand especially on those located beyond geographical hub. This is due to the
clustering of funds and investment opportunities which are only prioritized in
branches located in the hub. This is one of their strategic plans to limit the risk of a
financial loss if another crisis will occur. In this case, most SMEs are left with
crowdfunding in different financial markets.

Let us take this as an example. I am a small business owner who wanted to apply
for a loan as working capital. I have a good credit score and I have been doing well
in my business in terms of cash flow. Even if I passed all the eligibility requirements,
I will still have a greater chance of disapproval due to banks’ limited resources and
opportunities. The result will still be “denied application” because of spatial issues in
the bank. So, I will instead look for other financial instruments to overcome monetary
constraints like borrowing from family, loan institutions, and cooperatives. However,
if ever I cannot look for any means of crowdfunding, I will be left on cutting off some
employees, supplies, liquidate assets, and worst is closing of the business. This
where the government policies and strategic business plans should apply to help
both the lender and the borrower.

VI. Implications

A. Education

A school is, after all, a business enterprise. It is a place of learning where parents
pay tuition fees in exchange for their child’s education. If a schools’ loan application
will be disapproved due to spatial issues, the burden will be passed over to the
students and staff. The management will have to cut off employees and workload will
be shared with the retained personnel. This means that employees will be more
stressed and overworked. They will also have to increase tuition fees which will
result in a rise in the number of dropouts and transferees. This would result in more
inconsistent learning and a lower chance of competitive employment for students.

B. Business

Business needs money or funds to survive. They take out bank loans to use it as
a capital to become more profitable. However, due to instances of denial of loan
application due to spatial issues, businesses will look for alternative ways to gain
money. An example is borrowing made through private loan institutions and other
financial instruments who charge more than the normal. Higher interest rates make
borrowing more expensive and it can be a huge problem for businesses that struggle
with day-to-day cash flow. If the business can no longer sustain or pay its debts and
daily expenses, they would have to cut off employees, their benefits or incentives,
future opportunities and worst is closure. Not only does it affect the business but also
those who are working from different sectors in the business.

C. Public Sector

Banks are one of the most important sources of funds of different public sectors
whenever their revenues cannot suffice to pay for their expenditures. In cases
where loan has been declined due to spatial issues, the public sector will resort in
privatization to cross – subsidize the public programs or apply loan in other financial
instruments for a higher interest. Privatization would mean inflexibility, less
transparency and higher costs of goods and services to consumers while higher
interests would mean more expensive services and taxes. In the end, the consumer
is the one greatly affected in this issue.

VII. Recommendations

The following recommendations are formulated based on the insights and

implications conveyed from the article.

1. The government should implement a policy to control this issue to avoid future
economic problems. The policy should make sure that financial growth
doesn’t focus only on the center of the business district but also on the areas
where fiscal and commercial growth is needed.
2. Lenders should offer alternative options to the SMEs and new ventures to
assist them in their financial growth.
3. Lenders should strategically plan their investment opportunities or offerings to
equally distribute it to areas where it is needed. This would eventually help in
the economic growth of the place.
4. Borrowers should utilize alternative lending such as real estate collateral to
secure a loan.
5. Borrowers should consider other financial instruments that are comparable to
the offers of banks or other institutions.