Challenges faced by SMEs when raising external capital investment for international expansion

Although SMEs make an important contribution to the growth of the UK economy, this is mainly derived from their activities in the domestic market place. In contrast, it could be argued that a reasonable percentage of the economic contribution made by public, transnational and multinational corporations is derived from the cross-border and international operations and activities.

Venture capital
It is clearly possible for SMEs to seek external help to internationalise their business, perhaps in the form of venture capital (aka Dragon’s Den and the like). However, research into the adoption of this approach has indicated that it may present a number of challenges for the owner.

First there is the problem of the SME owners/managers being able to present their innovative ideas in a manner that can accurately and transparently identify their business vision. There is a difference in language and terminology between SMEs and investors that often the former cannot bridge without expert advice, which again attracts additional costs.

Secondly, while it is natural for speculative investors to want a large share of the equity of the business they are investing in, this loss of value, and sometimes control, can have a de-motivating impact on the innovative strategy of the SME owners. Equally, often these types of investors have already formed an exit strategy before committing to the investment, which might involve selling the business to a larger public corporation or, alternatively, converting it into corporation publically quoted on the financial markets. While again these may be reasonable objectives for the investor, all too often this results in SME owners potentially either losing ultimate control over the direction of their business or, alternatively, effectively being jettisoned from it. True, they may walk away with increased wealth, but for some SME owners the business vision is more important and they may wish to retain a long term involvement in something that they have created.

Debt capital
Another option for funding SME internationalisation is through raising debt capital, through banks or other similar sources. However, all too often the SME will not have value of asset resources that will satisfy the security requirements of these institutions. Consequently, there is a tendency for owners to make business plan presentations to banks that is designed around securing the financial assistance they know they can raise rather than this being focused on what is required to achieve their strategic objectives. The result of this approach of course can increase the risk of failure of their international objectives. Moreover, with all due respect to banks, while many in the UK have reintroduced the ‘business manager’ system, at the local level this does not provide a great deal of help for SMEs wishing to take their business onto the international stage. Moreover, reaching the higher echelons of international expertise available from high street banks can often be a complex process for SME owners, which many smaller businesses may be unable to master without expert assistance.

Conclusion and recommendations
It is apparent from this discussion that if external capital providers really wish to make a positive difference to the longer term success of the SMEs that they support and, at the same time, reduce the risks associated with such investments, there is a need for them to take account of the psychological and practical challenges faced by SMEs, which will impact on their decision regarding how to present their plan and whether to accept the offers being presented. Conversely, it is equally important for SMEs to learn more about the mechanisms and criterion that are applied by external capital providers, as this will enhance their chances of successfully securing an arrangement that fits their business and personal aims, objectives and expectations.

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