Mind the Gap Essay Example | Topics and Well Written Essays - 2500 words

Mind the Gap - Essay Example Table of contents Abstract 1. Introduction 2. ‘The Small and Medium- sized Enterprises’ 3. Financial crisis on SMEs’ capital structure 4. Sovereign debt crisis which affects the bank’s credit standards, credit margin, and funding conditions 5. Regulatory changes on policies that deal with bank lending activities 6. â€Å"The Federation of small Businesses† 7. Recommendation 1) Introduction â€Å"The Small and Medium- sized Enterprises† abbreviated as SMEs is defined by the European Commission as â€Å"an enterprise employing not more than 250 employees; having an annual turnover of not more than â‚ ¬50m and balance sheet assets of â‚ ¬43m; and that has less than 25 per cent of its capital.† However, SMEs are defined using three concepts and they include small, local, and single. They are small in nature when considering the number of employees, capital and assets, and turnover. They are also owned by a single owner who could only be the sole employee. SMEs are also local in nature because their markets are usually based on local areas or places of residence (Fielden, 2003). In the European Union, Small and Medium- sized Enterprises faces a number of issues in term of financing. These issues include effects of financial crisis on SMEs’ capital structure; the sovereign debt crisis impacts on bank’s credit standards, credit margin, and funding conditions; and the effects caused by comprehensive regulatory changes on policies dealing with bank lending activities. However, â€Å"The Federation of small Businesses† abbreviated as FSB, has come to rescue these SMEs by representing them in the issues for financial market (Ministry of defence, 2013). Its functions revolve around practices dealing with financial lending â€Å"of the small and medium-sized Enterprises.† 2) â€Å"The Small and Medium- sized Enterprises† The SMEs have been recognized as the key contributors of the econo my in the European Union, due to the way they have changed the union into a market oriented economy. Currently, statistics shows that 96% of the registered firms are recognized â€Å"as small and medium sized firms,† with SMEs accounting for approximately 82%. These small businesses actively contribute to 25% of the annual Global Domestic Product of the European Union (Villa, 2011). Despite their great contribution, SMEs are faced with financial crisis, cause by various factors hence affecting the capital structure. The financial sector within the European Union is characterized by a system based bank where SOCBs or state owned commercial banks play an important role. SOCBs provide 78 % of the overall loans in the economy, with half of its credits being channeled into SOEs. This, therefore, makes it difficult â€Å"for the small and medium size enterprises† to access bank loans. 3) Financial crisis on SMEs’ capital structure However, there are a number of factor s which leads to financial crisis that affects the SMEs capital structure. The first one is firm growth. It is suggested that firm’s growth is relatively negative to its capital structure. A SMEs’ information asymmetry may demand an extra premium for it to raise external funds, despite the true