Financial Problem for Chinese Small to Medium Sized Companies

2544 Words May 13th, 2013 11 Pages
Analysis of Financial Problem for Chinese Small to Medium Sized Companies

In the recent years, small to medium sized companies (SMEs) play an important role in most countries over the world. It has been a vital policy issue for governments to deal with these companies to increase development of economy. The financial difficulties faced by SMEs have restricted SMEs’ survival and development. SMEs exist a series of financial problems. This article focus on how to obtain effective financial source and dealing with the difficulties in raising finance for Chinese SMEs.
Key words: Small and medium-sized Companies (SMEs); Financing.
SMEs are the necessary power for economy growth. As Beck and Demirguc-Kunt (2005,
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Brookfield introduced the rough structure about the order for companies to raise money. In China, the order for SMEs to get support is followed by accumulation of enterprises, bank credit loans, private loans, and other means (WANG, 2009).
In the term of internal financing, SMEs can obtain a little capital through their own capital, including their original investment and retained earnings (Zhang, 2012). The owner’s personal investment in business consists of two parts, their own capital and funds from their friends or families. Retained earnings are also a limited source of capital for new businesses, particularly for those industries that take years to mature, such as the biotechnology and pharmaceutical industries (Ritchie and Xiao, 2004, p29). Enterprises use retained earning to distribute the profit after tax and to determine the amount of retained money for companies. It can increase the capital of the enterprise without increasing corporate liabilities (Bai, 2011). At the beginning of business, these equity investments might adequate for the current period to carry out the basic operation. Obviously, these are not enough for further development, especially in capital-intensive industries. In short term, it makes up a high position of self-raised investment for SMEs while external financing source is limited.

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