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

Which of the following is a typical reason why small and medium-sized entities find it harder than large listed companies to obtain bank finance?

SMEs often lack a long trading record and sufficient assets to offer as security, so lenders view them as higher risk. This makes banks reluctant to lend, or leads them to demand guarantees, higher interest rates and stricter covenants.

  1. ALenders can rely on the audited published accounts of SMEs, which increases their borrowing cost
  2. BSMEs usually have a higher proportion of long-term debt, which reduces the security available
  3. CSMEs often lack a track record and sufficient assets to offer as security, so lenders see them as higher riskCorrect
  4. DSMEs are legally prohibited from borrowing without a stock exchange listing

Explanation

Lenders view SMEs as higher risk because they commonly have short trading histories, limited information, weak asset backing for security and dependence on a few key people. Hence they may ask for personal guarantees and charge more. The other options are factually wrong or not a recognised barrier.

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