Keeping Account Blog #3 – Access to Finance

Access to finance is indeed a critical challenge for many entrepreneurs and small business owners. The gap between having a promising business idea and actually obtaining the necessary funding to bring that idea to fruition can be daunting.

Need for finance

The need for finance occurs for a range of reasons depending on the stage of business development:

• Startups: to fund initial asset purchase and operating capital to acquire inventory;
• Microbusiness: to fund working capital and acquisition of additional equipment as initial stability is achieved;
• Small & Medium sized: to fund expansion and growth, technological advancement, new business development and staff and management training; to achieve export readiness;
• Large enterprise: to fund research and development; create additional export and distribution opportunities, expand labour force;

Many entrepreneurs and small business owners possess ideas, but do not have available wealth to fund their startups, and this has led to a high failure rate traditionally, not due to lack of a good business idea, but poor access to finance and more importantly the training and mentorship that would make it possible to counter and prepare for this single challenge.

Our traditional sources for funding of business are highly risk averse in an effort to protect their profitability and level of shareholder return. Unfortunately, the gap I previously alluded to is filled with many misconceptions by both lender and borrower on the needs and abilities of the other. So how do we bring them together in a manner conducive to the needs of both parties and most importantly our future socio-economic growth and sustainability?

Objective of lenders

• To increase their wealth;
• To mitigate against their minimum level of acceptable risk;
• To provide satisfactory return to the owners of the wealth they manage;

Objective of borrowers

• To have their business financed;
• To achieve funding at the least cost possible;
• To meet their obligations and ensure sustainability.

A useful model/concept

While we have many traditional avenues for the provision of financing for new and expanding businesses, we collectively need to revisit our local funding spectrum with a view to providing the right type and mix of funding across the varying stages of business at the right time and from the right source.

The table indeed underscores the significance of the banking and credit union systems in our financial ecosystem. These institutions serve as the primary conduits through which individuals and businesses access capital. However, their risk aversion is understandable, given their fiduciary responsibility to safeguard the funds deposited by customers and adhere to stringent regulatory requirements.

This risk aversion often translates into stringent lending criteria, which can make it challenging for certain individuals and businesses to access finance. Moreover, the regulatory framework governing these institutions continues to expand, further reinforcing their cautious approach to lending.

While this risk aversion and regulatory compliance are necessary to maintain financial stability and protect depositors’ interests, they can inadvertently contribute to limited access to finance for certain segments of the population or businesses, especially those deemed as higher risk.

Efforts to enhance financial inclusion and promote alternative sources of finance, such as angel investor networks, venture capital funds and other government-assisted initiatives, could help address some of these challenges and ensure that access to finance is more widely available. However, striking the right balance between risk management and financial inclusion remains a complex and ongoing endeavour for policymakers and financial institutions alike.

The local finance and business investment landscape

Commercial banks – as a source of finance have served us well over the decades of business activity in Barbados. The banking sector is very interested in the development of business, but we must understand their inherent objectives as commercial and often publicly owned and traded entities. As illustrated above, the banks should come into the financing equation at much later stages than we are accustomed to. In earlier stages their simple role should be the provision of consumer services – (deposit and savings accounts, credit cards).

Credit union league – have come to the forefront in recent years as a supporter of business enterprise through the activities of its members. As a member’s organisation, the objectives are significantly different, and as a result, the attitude to risk can be more relaxed, though not ignored. These organisations have already been making their mark locally in the startup and micro business financing segment and are currently strengthening their resources and approach to lending.

Venture capitalism – our initial forays into this area of business financing have not been the biggest success, largely due to misconceptions about this type of finance and some conservatism on the part of potential investee companies. It requires some level of transfer in legal ownership for the investment’s duration, and typically this is a challenge for business owners without an entrepreneurial mindset. Venture capital is often a segway from angel investment. The Barbados Agency for Micro-Enterprise Development expects to launch a new venture capital fund in the near future and is currently exploring its capitalization.

Angel investment – has never been officially undertaken in Barbados as a part of our funding spectrum for businesses. The Barbados Entrepreneurship Foundation (BEF), and its champions have been working on the creation of the regions first formal angel investment network – Trident Angels – and we are now in the advanced stages of its setup. This type of investment utilized a network of high-net-worth individuals often entrepreneurs in their own right seeking opportunities to invest in new businesses and provide their expertise and experience in terms of mentorship and guidance. As a result, the level of accepted risk is much higher, and so the expected return will be as well.

Leveraging entrepreneurship as a catalyst for socioeconomic development requires a concerted tri-partite effort from the government, the private sector and the businesses seeking investment capital. Creating a level playing field and ensuring equitable access to the appropriate forms of finance are pivotal in fostering an environment conducive to entrepreneurial growth and innovation. By aligning the efforts of the government and the private sector, we can unlock the full potential of entrepreneurship as a driver of economic growth, job creation, and social progress. Collaboration between these stakeholders can help address systemic challenges, expand access to finance, and empower entrepreneurs to realize their aspirations and contribute to sustainable development.