Sserumaga James -2020/HD10/16916U

Relationship Between Entrepreneurship and Banking

Today, entrepreneurs have a wide range of tools to finance the creation of an enterprise, bank credit,

venture capital, crowdfunding, public subsidies, etc. (Fellnhofer, 2017). However, according to the Global

Entrepreneurship Monitor (GEM) (Champenois, 2014), the financing of business creation is largely based

on the “3 F” (friends, family and foolhardy strangers).

The family (Casson, 1982) is the main funder of the enterprise, whether through direct or indirect

financing or through the social relationships that it helps to develop. But family financing and the

entrepreneur’s savings are not sufficient (Savignac, 2007). The entrepreneur needs additional resources,

primarily bank credit, which is currently the main source of external financing, especially for small- and

medium-sized enterprises (SMEs) (Calme and Polge, 2018). In France, bank credit finances about 90

percent of the needs of SMEs, compared to only 25 percent in the United States, mainly due to the

increase in crowd funding (Mariage and Le Pendeven, 2015). On the contrary, the contribution of venture

capital to the financing of companies remains largely in the minority. According to the OECD, it

represents about 0.03 percent of GDP for France compared to 0.34 percent in the United States in

2015 (Dubocage and Rédis, 2016). Bank credit basically involves two protagonists, the entrepreneur and

the banker. The success of business creation thus depends on the creation of a relationship of trust

between them.

Key to note, however, is that the relationship between small firms and their banks appears to be very

damaged. Currently economic confidence is at a generational low, the financial services sector is in

turmoil and relationships and understanding between the banks and the small business sector have

become increasingly toxic. On top of this, the nature of relationships between banks and
entrepreneurial new ventures are seen to be persistently determined by the interests of banks. Banks

are finding themselves in a quandary about how best to support those within the small firm sector in

times of tight credit (Irwin and Scott, 2010; Hyz, 2011; Berger and Black, 2011). With increasing market

fragmentation and competition, they face real challenges to establish long-term relationships with their

small firm customers in order to retain and, if possible, increase market share in an environment where

credit opportunities are tight and likely to get even tighter (Lindstrand and Lindbergh, 2011; Berger and

Schaeck, 2011)

A recent study in Scotland found that “there were problems for entrepreneurs concerned with matching

the information required by the bank, due diligence and the financial modelling process, timing and

understanding of their businesses” (Deakins et al., 2010, p. 207). What emerges from all scholars is a

real need for small firm owners and banks at the level of the branch as well as at a corporate level to

better understand each other’s worlds and for each to be much more sensitive to those circumstances.

What is needed is for each party or actor to recognise the unique circumstances that characterise each

other’s enterprises and to manage the relationships between them with a view to greater mutual

understanding

However, increase in the number of independent banks in a region has several effects for borrowers,

according to Thakor (1996). With an increase in the number of independent banks, borrowers can

request funds from multiple banks. A greater number of independent banks increases the probability

that at least one bank will accept the request after a screening process. Thus, the probability of

receiving credit increases with the number of independent banks in a location. The physical presence of

banks is not the only prerequisite for increasing the rate of start-ups. The market structure of the local

bank sector also influences access to financial capital. The size of the local bank branches provides an

indication of their structure and available services.

There are several ways banks could get involved in small and medium scale enterprise finance, ranging

from the creation or participation in SMEs finance investment funds, to the creation of special units for

financing SMEs. Along the lines of the main functions of banks mentioned above, we shall now

examine their role in entrepreneurship development and enterprise financing. And for the purpose of

convenience and proper understanding, the roles can be categorized as follows;

 Statutory Roles, these consist in the main the functions for which banks were created in the

first place. Such roles are for example accepting of deposit and safekeeping of same, transfer

of money, giving of loans and advances, etc. By accepting deposit of customers especially

entrepreneur-customers, the banks will be providing security for customers’ money and giving

them opportunity to use their deposit to borrow more money from the banks to finance the

running of their enterprises

 Financing Roles, the primary reason that banks want deposits is to enable them grant loans

and advances from which they earn interest income. Extension of credit to the economy for the

financing of business enterprises is the core link that banks have to the real sector

 Business Investment Promotion Roles. Because of the specialized and professional status of

banks, they are in a position to play investment promotion roles to entrepreneurs. Such roles

may include management of investment for customers, advice on sustainable lines of

investment to follow by analyzing the pros and cons of each investment alternatives to the

entrepreneur-customer.

 Advisory, Guaranty and Consultancy Roles. In addition to the normal lending and other service,

banks now also engage in business advisory, guaranty and other consultancy services which

help immensely in the promotion and financing of entrepreneurship activities in the country.
  Other areas Other areas in which banks could offer advisory and consultancy services to the

SMEs include methods of control systems or measures to be adopted by the enterprises with

respect to defined lines of business or trend of challenges. Advice on methods of raising capital

or reorganization of a company to bring about the desired level of efficiency. Advice on tax and

tax related matters. Status enquiry services could be offered to effect credit purchases within

the domestic markets

The banks could also perform a great role in entrepreneurship development by organizing, sponsoring

and supporting entrepreneurship education and training programmes either directly or in conjunction

with other organizations and stake holders in order to manage the below problems faced by

Entrepreneurs while accessing finance:

 Unavailability of proper financial records as a result of lack of financial management knowledge

of lack of bookkeeping skills.

 Lack of collateral security due to poverty

 Lack of connections as a result of inability to network.

 Banks do not see the viability of business ventures

 Misinterpretation of the business plan. This challenge can be as a result of the business owner

or manager failing to interpret his/her own business plan, or the bank officials failing to do so

the way the owner does.

The Banks are also faced with the below Problems in granting and recovering loans:

 Problems of loan default, Loans are classified as problem credits when they cannot be repaid
  Lack of collateral, Collateral is a property or other asset that a borrower offers as a way for a

lender to secure the loan. If the borrower stops making the promised loan payments, the lender

can seize the collateral to recoup its losses

Consequently, If the entrepreneur’s projects are extravagant, he can go into debt for no reason, the risk

of a financial crisis is even greater if the banker behaves in the same way. Hence, the interest is in

favouring strong links through which a relationship of trust can be built. But the banker may be reluctant

to finance the innovative entrepreneurs’ projects and opt for financing that is not risky because it is

known. The economic evolution over the past 30 years has given the entrepreneur a major position

again. Managerial capitalism is transforming itself into an entrepreneurial society. But twenty-first

century capitalism is not that of the eighteen or nineteenth century. The entrepreneur is incorporated in

professional networks in which the contributions of entrepreneurs, enterprises, research centres,

universities and public institutions are combined, in which trust plays always a fundamental role to

develop business activities. The economics of the entrepreneur and the banker based on the analysis

of their historical roots highlights various invariables that can used today to understand the financing

relation related to the management of innovation. Although strong ties always play a role in the quest

for new financing resources, the increase in the number of stakeholders enables weak ties to have a

greater importance. The quality of the project will thus be essential to find new financing resources.

This shows the importance to develop assistance and support for business creation to advise the

entrepreneur so that he/she develops a good project.

References

1) Fellnhofer, K. (2017), “Financing entrepreneurship by risk capital – evidence revisited”, Journal

of Business and Entrepreneurship Development, Vol. 10 No. 2, pp. 173-188

2) Granovetter, M. (1973), “The strength of weak ties”, American Journal of Sociology, Vol. 78 No.

6, pp. 1360-1380.

3) Moriarty, R.T., Kimball, R.C. and Gay, J.H. (1983), “ The management of corporate banking

relationships”, Sloan Management Review, Spring, pp. 3-15.

4) Reynolds, P., Storey, D.J. and Westhead, P. (1994), “ Cross-national comparisons of the

variation in new firm formation rates”, Regional Studies, Vol. 28 No. 4, pp. 443-456.