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Briefing | Ways to finance MSME’s

Published:Tuesday | November 27, 2018 | 12:00 AMDr Andre Haughton
The Jamaica Stock Exchange building at Harbour Street, downtown Kingston.

Micro, small and medium-size enterprises (MSMEs) contribute to economic growth similar to multinational corporations even though they are small in size.

The key here is quality as opposed to quantity. Standard multinational corporations seek economies of scale; their aim most times is to maximise profit through cost reduction and bulk output to expand global market reach, while MSMEs, given their small size by nature, also want to increase their market size but might be unable to do so in the short run due to capacity constraints.

MSMEs do not have the capacity to benefit from economies of scale but are still relevant because they can specialise in niche products to meet individual consumer needs, making their products more intimate and, therefore increasing market demand. Many of these MSMEs however, find it difficult sourcing capital. Below, we outline a few funding options that can be explored to assist these firms.

 

Nano Stock Exchange

 

The Nano Stock Exchange could be designed as an electronic platform where investors could buy penny stock in small companies. The Nano Stock Exchange would operate similar to the Jamaica Stock Exchange and the Junior Stock Exchange but with fewer initial capital requirements and other stringencies.

The Nano stock market would facilitate trading and sale of stocks via an electronic/mobile money trading platform incorporating blockchain technology.

The Nano Stock Exchange would be advantageous to businesses that might not otherwise receive financial support from mainstream banking. Another benefit of the Nano Stock Exchange would be that it would facilitate ease of transactions, since transactions are done via mobile phone, which may act as an incentive for investors to participate.

The Nano Stock Exchange could help to transition businesses from the informal to the formal economy. It would also increase financial literacy and market participation among mobile-phone users.

A disadvantage is that policymakers may not fully grasp the concept, including the electronic transfer of equities and so on. However, given the increased investor appetite for Jamaican equities as a result of our world leading performance, the Nano Stock Exchange would be a delightful addition and a useful diversification of national equity-investment offerings.

 

Secured transaction framework

 

This is a form of financing where a business can use movable property as collateral. Many small and micro businesses face a huge difficulty in obtaining financing from banks due to collateral constraints. The secured transaction framework, through contractual obligations, allows the lender to repossess the assets of the borrower and therefore reduces the challenges of small entities obtaining well-needed capital.

The practice of secured transaction can increase access to capital for micro and small enterprises and has been employed in other countries. The technique also has the advantage of lowering the interest rates that these business pay for loans from lending institutions.

 

Crowdfunding

 

Crowdfunding can be an innovative way for micro and small enterprises to raise funds. Crowdfunding is rooted in the idea of a large number of donors contributing small sums of cash to an entity crowdfunding. When compared to traditional finan-cing, is more suited for micro and small entities, given that traditional funding methods normally involve a single entity or a few people funding a business with large sums of cash, while crowdfunding involves a large number of persons contributing small sums of cash to a business.

 

Venture capital

 

MSMEs can also source funds through venture capital. A venture capital is a form of private equity that funds small emerging businesses in their early stages that have the potential to expand and grow. The venture capitalists invest capital in return for a percentage of the company. Sometimes venture capitalists are good because they provide financial support, as well as expert business advice and linkages. Depending on the size of the capital that the venture capitalist brings, they may end up with majority shareholding.