Introduction to Small Business
Martin and Gardiner (2007, p.309) states that “every business big or small in its present scenario is started in the form of a small business only” (Martin and Gardiner, 2007). Steve Jobs, one of the greatest entrepreneurs and founder of Apple Company, have also said that every small business requires being passionate in order to succeed. However, Green (2014) also agrees to the same and said that due to rising challenges in the business environment of an organization, there is requirement of constant work and passion to become successful (Green, 2014). Globalization and internet are the major reason for the growth of small businesses. This is due to the fact that these developments assist business working and operations to lower its operational cost. As per Martin and Gardiner (2007, p.310), any business which has less then 500 employees is termed as a small business enterprise (Martin and Gardiner, 2007, p.310). Although, Van Auken (2015) critizes that "this number varies from industry to industry" (Van Auken, 2015). Small enterprises do not generate revneue as high as the big enterprises, but play vital role on the growth of an economy. They provide employment opportunities to many unemployed individuals. Thus, they are offering a source of income to deserving candidates thus leading to increase their living standards. They promote innovations and thus help an economy to increase its business potentials. It was also found that small business enterprise or SME's provide business associated assistance to large corporations as well. Generally, SMEs stand for Small and Medium Enterprises of a nation which operate their business at small level and a very low scale.
In United Kingdom itself, there were 1,46,000 increase in number of small businesses. This led to a record of 5.4 million of private sector SME's by the start of 2015 (Statistics, 2015). Private sector comprises of 99.3% of small business and 62% of sole proprietors (BDO Hospitality Consulting, 2014, p.6). Small enterprises generated 25.2 million of employment and produced a turnover of £3,500 billion. Since 2010, Wales had taken a lead initiative in the development of small and medium size business. This has radically increased their growth. 400,000-500,000 number of small businesses are encouraged by the individuals who wanted to become an entrepreneur or business man (BDO Hospitality Consulting, 2014, p.6). In the next five years, small business sector is estimated to grow more in numbers. There are currently various factors that are helping the small business entrepreneurs to grow and flourish in the economy. Furthermore, as more financial funding will be available to these businesses, it is expected that they will increase their operational capabilities thus will generate more earnings and revenues. Internet will also help them to groom and grow. As government are providing financial assistance, it is evident that support from various institutions will help SME to expand.
Background of UK Hospitality Industry
UK's hospitality industry is inclusive of tourism, travel, and leisure oriented enterprises that were affected by the economic recession. This economic crisis got over but it has deeply affected the economy of United Kingdom. Although, the recession of 2008 is over, the effects are still visible especially on the hospitality industry (BDO Hospitality Consulting, 2014, p.7). It is evident from the less number of tourist traffic which has been shown from low return to the business. Already the country is facing unemployment problems such low number of available jobs to the individuals and etc. Rise in competition due to increase in small enterprises and entrepreneurship is also apparent. The main issue in hospitality industry is to increase employment level up-to 208,000 by the end of 2017. This is a challenge as only those individuals will be recruited who have good customer services skills and is qualified up-to the norms of hospitality industry. Thus, the individual with only high qualification and better skills have greater scope in this industry. Around 30 million of tourists visited UK and generated £16 billion earning to the economy. Recently, UK industry has generated 1.7 million people, helping around 6% of population to receive employment (Hemmington, 2012, p.1). The total worth of the hospitality industry is £60 billion. The major contribution to the amount is from hotels, spas, resorts, restaurants, camping sites, pubs, entertainment, Venuses and convention centres. Tourism industry has generated great growth opportunists from the locals of the United Kingdom. Residents of the country were able to spend around £59 billion on average of 75 million holidays.
The number of small and medium size entrepreneurs are more in number as compared to the large companies. On average, 75% of SMEs have appointed less then 10 young individuals in order to promote employment (Hemmington 2012, p.3). Although the financial crisis created numerous amount of problems for the economy. These business have tried to overcome them and have successfully grown. Sectors like catering, leisure, tourism, language mediators and food industry is attracting students as it is a reliable source of career. Individuals are drawn in as they have identified scope in hospitality industry. BHA i.e. British Hospitality Association manages all responsibility of the hospitality industry. The organisation's main aim is to increase the potentials of UK hospitality industry to become the leader (Hemmington 2012, p.4). BHA is achieving its objective by indulging all industry players along with the government to attain its main goals. Increasing growth prospective, generating competitive advantage, and securing valuable jobs for the people. This is the best time for UK's hospitality industry in terms of business growth and expansion. Although still the industry is facing difficulties but it is admirable that it is able to generate up-to 25% of jobs for the individuals as compared to the last two years (Hemmington 2012, p.4). Another objective of the organization is to stimulate job opportunities and help the tourism industry in terms of growth for the betterment of the economy.
It is evident that small and medium sized enterprises are playing an important role for the economy as well as the hospitality industry of United Kingdom. On contrary it is still facing financial problems. This industry is struck with the problem of low tourist traffic as less customers are coming which is reducing income prospects of the industry. Thus it is getting very difficult for the hospitality industry to manage growth and generate employment opportunities (Cole, R.A., 2013). This is considered as a negative factor for the economy as a whole. As contrary these SMEs are available to create a good number of earning through their business activity. They can improve their present condition with the help of financial support . This is die the fact that adequate finance will help them to bring innovation in their products and services at a fair price which will in return attract potential customers towards the same. This will prove fruitful for the growth of economy in return. Grants, funds and loans are considered to be good source of finance for these SMEs.
Rationale/Reason of the Study
This research is based on the study of market trends in order to identify the factor that will help SMEs in creating growth opportunities. The study also helps in finding out financial resource to provide support to the small and medium size enterprises. Another theme that the research studies is the sources that are currently used by the small business. Thus the research is able to discover the source of finances being utilized by the SMEs.
- In the hospitality industry, which financial sources are accessible to the small business?
- What are the sources that are only accessible to the small business of the hospitality industry?
- What sources are being used by the small business in the hospitality industry.
- To identify the financial sources that are accessible to the SMEs in the hospitality industry.
- To determine as to which sources are only accessible to the small enterprises.
- To find out which financial sources are actually used by the small business enterprise in the hospitality industry.
Personal savings, loans from friends and family, angel investors and speciality loans are the main sources of financial funding accessed by the small business enterprises in the United Kingdom (Lee and Drever, 2014). These are easily available and do not require any security and does not levy any restriction like the government agencies and banks.
Sources of finance accessible to small businesses
All around the world many people or individuals dream to start their own small business or to become an entrepreneur. While making the decision to start a new venture, many other significant decision have to be taken by the SME like funding the business and identifying needs of the operations and etc (Melia 2011, p.5). Business plans plays a vital role in identifying sources for funding the business. Business demonstrates how the business will be able to generate revenue for the entrepreneur. In the process of making a business plan, the plan clearly demonstrates how the business will be making money for profitability. There are numerous number of financial funding available to the business and many sources are being currently used by the hospitality industry as well. Every type of business is able to access these sources of finances working in the hospitality industry. Among them personal saving is the major source of finance. This source is easily available and does not requires the entrepreneurs in wasting his/her time and efforts. The business is only accountable for the borrowed money and does not have to bother for any debt or interest which increases the principle amount. On the other hand, the main disadvantage of using personal savings is that the person is in high risk to loose his/her life savings in the form of personal savings (Jenkins 2013, p.35). The major risk probability lies if the business is not able to succeed in the market, in this case the entire money is been lost. It is advisable for entrepreneurs who are starting their business through sources of personal savings to get an bank account dedicated to their savings only. The person can invest the amount of savings in this account and thus may be able to reduce risk of losing the money.
Another source of financial funding is taking loans or borrowing money from closed family members or friends (Jenkins 2013, p.40). There are few umber of entrepreneur who prefer to borrow more from their friends and family as they might not be in a sound financial position as to accept a borrowing. Many a times friends and family members are also not in a state to provide money to the borrower. Although many individuals prefer this option as funds in this are easily available as compared to borrowing loan from the bank or financial institution. One disadvantage of this source is that it discourages people as they are not certain that they will be able to pay back the borrowed amount to the respective person or not. The risk is that they might fail to succeed and thus will have to bear problem of debt. The one thing that can be applied while borrowing loans from friends and family is to make an agreement with the lender to avoid any sort of conflicts among the two parties. This way the borrower will be able to eliminate the factors that mazy force him/.her to face issue of a huge debt.
The third source of funding is applying for a business loan in a financial institution in a bank. There are numerous number of institutions who are providing loan to support small business enterprises in their initial phase (Rana 2009, p.25). The loan is given on the basis of the amount exactly required by the business in order to start their business. The loan can be used for promotional activities or purchasing of raw material or paying for the salaries of the employees or paying rent for the office or maintenance of the management. A loan for the business is recommended as it will boost the business in starting up all the business activity of the business as a whole. The personal loan can be taken from independent financial institution other then banks. These institution may or mazy not have toes with the entrepreneur and can help him/her in starting the business. It is recommended for the venturist to understand all the term and condition levied by the banker or the lender of the loan in before signing any contract with wither of the parties. These conditions may be regarding payment of the interest and principal amount of the loan or any sort of penalties/ default that may be levied by the bank in absence of any accurate knowledge of the entrepreneur. In the current situation there are 'n' number of financial institutions that are offering business loans to news and emerging business enterprises and start ups. This lets the banker or the financial institution in attracting more customers who are in need to purchase loan services. As the banker or the financial institution will be able to achieve their target of customers by encouraging in more start ups and SME to buy for a personal loan further helping the economy grow.
Sources of finance only accessible for small businesses
There are numerous sources available for the entrepreneurs to fund their business. But there are few specific sources that are available to only hospitality industry. Banks have rejected proposal of hospitality industry thus this method have been evolved for them. More then 47% of hotels, restaurants, and investors were rejected for a loan (Jenkins 2013, p.44). Thus lenders offering specialised loans have increased with a subsequent number. Boost capital and Ashley business cash offers loan for specific business activity like purchasing new equipment and etc. These speciality lenders understand the market trends and issues that new businesses face at the time of starting up. They provide help to the business in resolving these issues (Jenkins 2013, p.44).
These speciality lender offer lump sum cash which has to be paid on a daily basis. They also do not charge extra fee or any late penalty. As the demand for these loans are high it is expected that speciality lenders will also increase. Thus small and medium business enterprise can generate earning through acquiring specialised loans for establishing their business.
Sources of finance being used by small businesses
There care many sources of funding available to the entrepreneurs but all of them is not accessible by them. All the hotel owners may prefer different form of sources for funding (Jenkins 2013, p.50). As bank loans are very expensive they are not preferred by the small business enterprise of hospitality industry. For example bank loans can only be used for the reason they are assigned. If funds were borrowed in horde to expand the businessman can not use them for reason other then this. As bank loans have high interest rate they discourages the entrepreneur to choose them. Personal saving, loans from family and friends, speciality loan and angel investment is only preferred by the SMEs (Jenkins 2013, p.54).
Discussion And Analysis
Finding of the literature review has reflected that most of the small business enterprises (SMEs) of UK which are operating their business in hospitality industry require funds for different purposes. These organizations have tried to use different sources of finance for raising their capital but only few firms have got success in getting appropriate funds for running their business operations (Martin and Gardiner, 2007). Lots of SMEs fails to obtain funds from various resources because of the financial position, low growth rate and termination of operation and production for some specific time, etc. Due to all these reasons, most of the banks do not provide funds to small business enterprises of hospitality industry of UK. In this situation, SMEs move towards family and friends who are ready to give specific amount of credit (Jenkins, 2013, p.35). There are different reasons because of which small business enterprises require fund such as SMEs want to expand their business at large level as well as also wishes to increase their number of customers by augmenting marketing activities. Organizations require funds for satisfying the demand of their customers by producing appropriate goods as per their needs for funds. Along with this, literature has also disclosed that most of the SMEs want to enter into the other market of different locations for raising number of customers for their organization. Geographical expansion of the business augments the demand of funds (Jenkins, 2013, p.36).
At the time of expansion, small business needs to focus on development of the company’s office at new location, selection of new staff members and increment in number of operations and production, etc. All these functions need to increase the demand of investment. Along with this, small business require funds if it wants to start any new venture into the market. Any business which have appropriate amount of fund and retained earnings can easily manage the different operations in effective manner. But all those organization which wants to start new venture they require appropriate amount of money for purchasing necessary equipment and machinery to start production. Along with this, promotion of new venture also raise demand of money (Hemmington, 2011). In addition, funds are also helpful in reflecting the cash flow as well as helps in remaining business in running manner. Including this, money is also required for paying salary to employees and payment to suppliers for raw materials in operation and production. Along with this, payment of utility business also increases the demand of capital for small business enterprise. Findings of literature has also reflected that funds are required for different other activities of the business such as renovation and any other renovations due to the disaster in the organization (Jani and Han, 2013).
As per the literature review, financial resources has positive as well as negative impacts on financial performance of an organization. Most of the sources of funds are linked with the high amount of interest payment and security volume which augment the total cost of the financial resource. Along with this, it also raise the cost burden on small business enterprise which can increase the financial expenses and reduce the new profitability of the organization. Therefore, cost of financial resource can decline the overall performance of the company. But, on the other hand, Small business enterprise gets appropriate amount of funds by these resources which helps in purchasing equipment, machinery and other assets. All these things help in improving performance and proficiency of operation and production department of company. It will help in improving quality of the organization. Customers can easily satisfy their needs by the products and services of the funds which leads high sales and demand of the products and services. Overall, it will leads a strong hike in performance of the company. Therefore, current study has reflected that Small business enterprise can easily improve their performance by using most appropriate and suitable sources of funds for raising financial capital of the organization.
The report can be concluded that the major source of funding for small business is personal savings, speciality loans as well as angel investors. These are mainly used by small hotels that are operating in UK hospitality industry. The sources are mainly preferred by hotel owners on account of their easy access, non-requirement of any collateral as well as lack of restrictions related to bank loans and government grants. It has further been concluded that there has been a substantial increase in small and medium hotels. This has been on account of improvisations observed in economic conditions, presence of many domestic and foreign investors who are looking for profit making. These conditions if remain persistent then they may promote the growth of business in best possible manner.
There is a presence of huge competition in the market which is making it difficult for the enterprises to enjoy profitability. As a result it is very difficult for small businesses to operate in such a market. This is as the markets may not be able to attract consumers on account of decreased innovation, low production, declined service quality as well as poor facility. There is further a presence of lower morale that may impact the overall operators of small business. It is further concluded that the need is to acquire funds so as to optimize the performance. However, it may not seem to be an easy option on account of risks associated with poor managerial expertise, no collateral as well as high leverage. This may result in causing hindered or slow growth.
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- Hemmington. N., 2012. From Service to Experience; Understanding and Defining the Hospitality Business. The Services Industry Journal.
- Jenkins. L., 2013. Creative Financing: How to Get a Small Business Loan without a Banker. 1st ed. New York: Gold Alliance Group, Inc.