The contribution of small and medium enterprises is very significant towards employment generation, poverty alleviation and the overall advancement of the private sector. According to a study conducted in 2010, SMEs (excluding microenterprises) in Nepal employ approximately 57 percent of total work force. SMEs form more than 96% of the total industrial establishments and contribute 83% to the industrial employment generation. They also share 80% of the industrial sector’s contribution to the national gross domestic product (GDP). However, besides the macro challenges of the nation regarding political instability and inadequate resources, the SMEs face constraints in terms of access to finance and poor managerial skills.
Despite other constraints faced by the SMEs, they regarded access to finance as their biggest constraint. The reason can be attributed to the following reasons why financial institutions are reluctant to cater to SMEs.
i. SMEs usually lack proper audited financial statements and collateral to secure loans
ii. The cost borne by financial institutions in providing smaller sized loans is relatively higher as due diligence costs are at par with larger sized loans
iii. SMEs generally require long term capital financing, whereas banks seek short term deposits to increase their liquidity position. This leads to a difference in the demand of the SMEs and what the financial institutions can supply.
iv. Financial institutions go for risk-averse companies from where they can easily raise their interest payments.
These aforementioned reasons have led to SMEs finding it difficult to raise capital for growth and expansion. However, due to the importance of SMEs in the Nepali economy there is an urgent need to cater to their needs and encourage external financing in SMEs. It is out of these needs that venture funds such as BO2 are set up in order to cater to their financing requirements.
Closely examining the problems of SMEs in Nepal, it was seen that traditional management and entrepreneurial skills, out dated technology and poor marketing skills are also factors that affect their growth, diminishing their competitiveness in the market. Not only will BO2 tackles problems regarding access to finance, but also provide managerial and technical assistance, providing SMEs with all round services necessary to boost its operations. Business support services in the form of business and market information dissemination, skill upgrades, minimum regulation and hassle free facilitation from the government agencies, and alliances and networking arrangements between and amongst the smaller enterprises as well as larger producers and exporters can greatly help the small producers in enhancing their capacities.