The impact of financial statement quality and firm characteristics on access to finance by small and medium-sized enterprises in eThekwini

Abstract

The South African government has established several public sector institutions that cater to small and medium-sized entities’ (SMEs) needs through the Department of Trade, Industries and Competition. These institutions, known as Business Development Service Providers, assist SMEs in running their businesses more effectively and can enhance access to finance as an alternative form of collateral in circumstances where security for a loan is required. However, most SMEs apply for finance from financial institutions. As access to finance has been identified as a major obstacle limiting the growth and survival of SMEs, the objective of this research was to investigate the impact of financial statement quality and firm characteristics on access to finance by SMEs in eThekwini using the “Applied and Received” approach. The main research objective was divided into three sub-objectives; these were to determine the forms of finance being used by SMEs, to determine the accounting frameworks being used by SMEs, and to investigate whether financial statement quality and firm characteristics affect their access to finance. To achieve these objectives, a questionnaire was administered to owners of SMEs in eThekwini. The results revealed that the main forms of finance used by the SMEs were overdraft facilities, bank loans, factoring, leasing, and hire purchase, and that the average rate of extent of access to finance is 19.10%. The findings also revealed that 4.8% of the respondents were using IFRS, 72.9% were using IFRS for SMEs, and 22.3% were using South African Statements of Generally Accepted Accounting Practice. Lastly, the findings revealed that firm age, firm size, collateral, and financial statement quality have a significant effect on access to finance by SMEs. Therefore, possession of such firm characteristics and financial statement quality are important predictors of SMEs’ successful access to finance. The Government needs to help SMEs by providing them with educational programs that will assist them in compiling and understanding their financial statements to keep them improving and surviving. Furthermore, an SME’s growth and survival also depends on its access to finance.