Microeconomics

Before the conclusion of this work we believe that it is important to give a microeconomic vision on the cost of financing of a SME. Until now we’ve analyzed the impact that the information asymmetries cause on the financing costs but from the credit organization point of view, in this section we will make a brief reference to the impact of the financing costs on the structure of a SME. In the first part we’ll mention the importance of the working capital within the company and soon will develop a practical case to give an idea of the effects of the working capital cost on the SME.

Working Capital

Most of the works published in the decade of the 90’s in Argentina (FIEL, 1996; Salloum, 1997; Yoguel, 1999; UIA 1999) agree on the critical importance of the working capital in the SMEs, although it is certain that this factor is important in any company the working capital increases it relative incidence as the size in terms of total sales diminishes. The results of these works showed that the average percentage of working capital over gross sales that companies had to maintain for its operation was 0/10% for larger companies, 20/40% for medium and 40/+% for smaller ones. However, another important factor to consider is that the SMEs normally had to maintain this working capital with own funds in greater proportion than larger companies, this forced smaller companies to reinvest profits in a greater proportion which indeed affected their profitability. As evidence, the mentioned works found that 70% of the companies of all sizes confirmed that were using the utilities reinvestment as financing source.

In summary, due to the lack of information about the liquidity of the business the banks rationed credit, thus the companies were forced to reinvest profits or turned to the financing of suppliers in order to maintain their working capital. Another result of theses works was that this relation reverted as the size of the companies increased. The mentioned circumstance has already been observed by the governments of some countries, such the case of E.E.U.U.: the SBA provided financial guarantees on 70/85% of the amount for working and fixed capital to 180,000 loans, estimated in U$S 31,000 million between 1980 and 1990. The result according to a study of Price Waterhouse (1992) on the matter, demonstrated that the companies covered by this guarantee had grown 300% whereas the rest had only grown 37% in the period 1984/8921. This empirical evidence talks by itself about the superlative importance that the working capital (liquidity) has in the business of the SMEs.

In the first part of the Annex I developed a practical model in order to somehow measure the incidence that has an increase of the interest rate in the cost of working capital.