A framework to improve access to external finance by Small and Medium Enterprise start-ups.

Abstract

Despite the efforts of the South African government to develop the Small Medium Enterprise (SME) sector, start-up businesses not only face restricted access to but also challenges in accessing external finance, which acts as the main barrier to their growth and development. In light of the aforementioned, this study aims to propose a framework to improve access to external financing by SME start-ups. The formulation of the framework is based on a review and critique of the literature on the key determinants of the success of SME start-ups, namely, start-up awareness, management skills, and the requirements of finance providers. SME start-ups may be considered as a special case of resource-based theory due to limited resources of the firm. Start-up awareness and management skills are considered as necessary resources that will help the SME to acquire and develop other resources that will lead to a competitive advantage and superior performance. This study has adopted a quantitative approach to collect and analyse data since this is the only way to test the various hypotheses postulated based on the resource-based theory. A sample of 252 SME start-ups was randomly selected from among SMEs located in Pietermaritzburg, the capital city of KwaZulu-Natal province in South Africa. Researchers may extent and roll out the research at the national level or other regions of the world. The data was used to conduct descriptive and inferential statistical analyses and structural equation modelling, using the Smart PLS statistical software. Seven hypothesised relationships were tested, and it was found that start-up awareness and management skills positively influence access by SME start-ups to government, corporate and personal/social sources of finance. This study provides the necessary tools to start-up entrepreneurs to improve their access to external finance in South Africa. This study specifically highlights the different determinants of start-up awareness and management skills, and explains how the SME start-ups’ applicability of these determinants would influence their external financing accessibility. Also, this study highlights how finance providers could be able to develop matured relationships with SME start-ups, assess their finance applications based on the determinants of start-up awareness and management skills. The proposed framework maps the start-up entrepreneur’s business awareness and the requisite management skills with the finance providers’ requirements for granting finance and provides the entrepreneur with a clear idea of the type of finance to apply for and the optimal financing options for their businesses.