Small
and medium-sized enterprises (SMEs) play a pivotal role in the national
economies of countries around the world. This is especially true of emerging
markets. They are considered to be an engine for growth in both developed and
developing countries; the benefits of a vibrant SME sector include: the
creation of employment opportunities; the strengthening of industrial linkages;
the promotion of flexibility and innovation; and the generation of export
revenues (Lerner, 2002; Rangamohan et al, 2007).

In
SA, for instance, eight out of 10 jobs that are created occur in the SME sector
(Karungu et al, 2000). In the US, Japan and Germany, small business contributes
more than half of the gross domestic product (GDP) in each of those economies.
Though SMEs have been the engine for growth in various developed and developing
economies, they have always faced problems in accessing finance.

Without
proper finance, SMEs can neither expand to compete globally nor can they
acquire technology or meet their fixed and working capital requirements
(Wanjohi and Mugure, 2008). SMEs face significant challenges, which include
access to finance (Iwisi et al, 2003) and financial management skills and
support (Gem Report, 2003). This contributes to slow development and high mortality
rates of small businesses in Nigeria.

Access
to finance is particularly relevant for previously disadvantaged entrepreneurs
who do not have access to collateral and the networks of wealthy individuals
who could provide angel financing. Financing is necessary to help SMEs set up
and expand their operations, develop new products, and invest in new staff or
production facilities. Many small businesses start out as an idea from one or
two people, who invest their own money and probably turn to family and friends
for financial help in return for a share in the business.

But
if they are successful, there comes a time when they need further funds to
expand or innovate further. Some SMEs often run into problems, because they
find it much harder to obtain financing from banks, capital markets or other
suppliers of credit (Afua, 2011).

Almost
every company we know of began as an SME. Vodafone as we know it today was once
a little spin-off from Racal; Hewlett-Packard started in a little wood shack;
Google was begun by a couple of young kids who thought they had a good idea;
even Volkswagen at one point was just a little car maker in Germany (as opposed
to being a giant small car maker globally) (Lukacs, 2005). Microsoft may be a
software giant today, but it started off in typical SME fashion, as a dream
developed by a young student with the help of family and friends.

Only
when Bill Gates and his colleagues had a saleable product was they able to take
it to the marketplace and look for investment from more traditional sources
Amissah 2009). The growth of SMEs has been hampered by the lack of adequate
knowledge and a well structured financial market for the mobilization of
capital. The role of finance has been viewed as a critical element for the
development of SMEs Cook and Nixson, (2000).

However,
venture capital has had a significant impact on Small and Medium Enterprises
(SME) in the developed countries; small businesses have been and are the
stepping stone of industrialization in these countries.

1.2   STATEMENT OF THE PROBLEM