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

Which of the following is the most commonly cited reason for the 'finance gap' faced by small and medium-sized entities (SMEs) when seeking external finance?

The finance gap exists mainly because lenders face high information and monitoring costs when assessing SMEs, which often lack security and an established track record. This makes lending riskier and less profitable per pound, so credit is rationed or priced highly.

  1. ASMEs are legally prohibited from issuing debt finance
  2. BLenders face high information and monitoring costs and SMEs often lack security and track recordCorrect
  3. CSMEs always have higher gearing than listed companies
  4. DStock exchanges require SMEs to pay dividends before raising funds

Explanation

The finance gap arises because lenders and investors find SMEs risky and costly to assess: information is limited, track records are short and collateral is often insufficient. The other options state restrictions or facts that are not true generally.

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