An evaluation of the debt financing options available for SMEs to obtain funding in Malta

Abstract

Overview: The importance of SMEs has been recognised worldwide as these enterprises are a major source of job creation and provide for a significant growth in the economy’s gross domestic product. Although SMEs are an essential factor to reduce unemployment and create value added in an economy, many of these businesses still encounter various difficulties in obtaining the funding they require. The focus of this dissertation was to assess the facilities offered by local entities to provide financing, the improvement of debt facilities and why SMEs choose to fund their operations through debt as opposed to equity financing.

Aim: One of the objectives of this study is to analyse the problems faced by SMEs in obtaining funds for day to day operations and growth, and how the different debt products available for SMEs in Malta help to reduce these problems. This study also analyses the process of how these products are granted and give a clear indication of why local SMEs tend to heavily depend on debt financing as opposed to obtaining a mixture of both debt and equity financing.

Design: This research involved both secondary data to cover theoretical aspects of the subject and also primary data in the form of interviews with local FIs, GIs, and advisory companies, and also questionnaires with local SMEs.

Findings: The findings of the study show that obtaining funding is not an easy task, according to the majority of respondents. Debt financing is the most popular external source of finance as this provides a number of benefits to SMEs. SMEs claim that the funding process in Malta is improving as both the Malta Enterprise and the EU are providing alternative debt facilities to the traditional bank funding. Nonetheless, there is still a lot of work to be done if SMEs in Malta are to have the same opportunities provided in different countries both in the EU and the U.S. Conclusion: From this study it emerged that the ideal capital structure for SMEs always includes debt financing. Furthermore, it is illustrated that the dependence on debt is a result of lack of alternatives available.