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Financial Management · Finance for small- and medium-sized entities (SMEs)

The Finance Gap and Barriers to Raising Finance for SMEs

Updated 11 October 2026 · Fact-checked

The finance gap is the shortfall between the funds an SME needs and the funds providers are willing to supply on acceptable terms. It arises from information asymmetry, lack of security, high costs and perceived risk. To answer, explain each barrier from the lender's view and suggest a remedy.

Understand The Finance Gap and Barriers to Raising Finance

A small or medium-sized entity (SME) is a business that is small in size and usually owner-managed. It often needs finance to start up, grow or manage cash. Many SMEs find that the money they need is not available, or is only available at a high price.

This shortfall is called the finance gap or funding gap. It is the difference between the finance an SME could use profitably and the finance providers will actually offer. Note that the gap is about what is offered on reasonable terms. Some SMEs could get finance, but only at a cost they cannot afford.

The Aston Report is a well-known UK study of the funding problems of small firms. Its key idea is the gap itself. You do not need to quote its details. Know the idea and the causes behind it.

The main cause is information asymmetry. The owner knows far more about the business than the lender does. Small firms often have limited track records, unaudited or basic accounts, and weak forecasts. The lender cannot easily tell a good business from a poor one. So it either asks for a higher return, asks for security, or refuses.

The second cause is lack of security. Many SMEs have few assets that can be pledged, or the assets are specialised or hard to sell. Owners may have to give personal guarantees, which makes them cautious.

From the lender's perspective, SME loans carry high risk of failure, high cost of assessing and monitoring small amounts, and weak information. Lenders also worry that owners control everything and may take on risk with other people's money. The result is credit rationing, higher interest rates and tough covenants.

On the equity side, SMEs cannot list on a stock exchange easily. Issue costs are high relative to the sum raised. Investors fear difficulty in exiting. Owners may also refuse outside equity because they fear loss of control.

How to solve The Finance Gap and Barriers to Raising Finance questions

Use this method for any question on why an SME cannot get finance or what to do about it.

  1. 1Read the scenario and note the size, age, sector, assets and the amount and purpose of finance needed.
  2. 2Define the finance gap: the shortfall between what the SME needs and what providers supply on acceptable terms.
  3. 3Identify the barriers shown in the scenario: information asymmetry, lack of security, high cost per pound lent, high risk, or owner reluctance to dilute control.
  4. 4Explain each barrier from the lender's point of view. Say why it makes the lender refuse, charge more or demand conditions.
  5. 5Link to the type of finance: short-term overdraft, long-term loan or equity, and say which barrier bites hardest for each.
  6. 6Suggest remedies: better financial information and forecasts, a business plan, personal guarantees, asset finance or leasing, government schemes, business angels or venture capital.
  7. 7Conclude with a clear recommendation or a judgement that fits the scenario.

Quickest way: Barrier, lender view, remedy

When to use it: Use for short written parts or objective questions where time is tight.

  1. Write three headings: information, security, cost and risk.
  2. Under each, give one line on the SME problem and one line on how the lender reacts.
  3. Add one remedy for each heading.
  4. Check that every point refers to the facts in the scenario.

Common mistakes in The Finance Gap and Barriers to Raising Finance

  • Defining the finance gap as any lack of finance.

    Students ignore the phrase 'on acceptable terms'.

    Fix: Define it as the gap between funds needed and funds supplied on reasonable terms.

  • Describing information asymmetry the wrong way round.

    Students think the lender knows more.

    Fix: State that the owner-managers know more than the lender, so the lender cannot judge risk.

  • Listing barriers without the lender's view.

    Students write from the SME side only.

    Fix: For each barrier, say how the lender responds: refuse, raise the rate, ask for security or add covenants.

  • Giving generic points that ignore the scenario.

    Students recall a memorised list.

    Fix: Use facts from the case, such as young age, specialised assets or no audited accounts.

  • Saying lack of security only matters for equity.

    Students confuse security with ownership rights.

    Fix: Security mainly affects lenders. Equity investors worry about exit and control.

  • Offering remedies that do not solve the barrier named.

    Students rush to name sources of finance.

    Fix: Match each remedy to its barrier, such as forecasts for information, leasing for lack of security.

Worked examples

Example 1

A five-year-old family-owned manufacturer wants a ₹50,00,000 bank loan to buy specialised machinery. It has only basic management accounts and few other assets. The bank has refused. Explain why, from the bank's perspective.

Show the solution
  1. Information asymmetry: the directors know the business, but the bank sees only basic accounts and cannot verify performance or forecasts.
  2. Lack of security: the specialised machinery would have a poor resale value, and there are few other assets to pledge.
  3. Cost and risk: a loan of this size to a small firm costs the bank much to assess and monitor, and the failure risk is higher than for a large listed firm.
  4. Result: the bank refuses or would charge a high rate and demand covenants or personal guarantees.

Answer: The bank refuses because it cannot judge the risk from the limited information, it has weak security in specialised machinery, and the risk and monitoring cost are high relative to the loan. This is the finance gap in action.

Example 2

Suggest how the manufacturer in the first example could reduce the barriers and narrow its finance gap.

Show the solution
  1. Information: prepare a detailed business plan and cash flow forecasts, and obtain audited or independently reviewed accounts.
  2. Security: offer personal guarantees from the owners, or lease the machinery so the lessor keeps the asset as security.
  3. Other sources: consider a government-backed loan guarantee scheme, business angels or venture capital if the owners accept some loss of control.
  4. Cost: compare the cost and conditions of each option before choosing.

Answer: Better information reduces asymmetry, leasing or guarantees address the lack of security, and external equity or government schemes provide other routes. The owners must weigh these against cost and loss of control.

Exam tips

  • Always define the finance gap in one sentence, including 'acceptable terms'.
  • Write from the lender's perspective when the question asks why finance is refused.
  • Tie each point to scenario facts, since generic lists score poorly.
  • In objective questions, remember information asymmetry means the owner knows more than the lender.
  • Pair each barrier with a matching remedy when asked for advice.

Practice questions from Finance for small- and medium-sized entities (SMEs)

The Finance Gap and Barriers to Raising Finance in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

The Finance Gap and Barriers to Raising Finance: frequently asked questions

What is the finance gap for SMEs?

It is the shortfall between the finance an SME needs and the finance providers will supply on acceptable terms. It can mean refusal, or finance only at a very high cost.

What is the Aston Report?

It is a UK study that highlighted the funding difficulties of small firms and popularised the idea of a finance gap. For ACCA FM, know the concept and its causes rather than detailed figures.

Why does information asymmetry affect SMEs more than large companies?

SMEs usually have shorter track records, less detailed reporting and often no audit. Lenders find it hard to judge their true risk, so they charge more or refuse.

How can an SME overcome lack of security?

It can offer personal guarantees, use asset finance or leasing, or use government loan guarantee schemes. Equity from business angels or venture capital avoids the need for security.