Models of Financing for SMEs Paper



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As Koop (2020) noted, a financial model is a numerical representation of the business placed to depict a company’s future. These could be future events and performances of a company.

This paper purposes to analyzing financing of the SMEs, challenges, and opportunities experienced from this obligation.


These models are needed for the growth of a business as having been formerly discussed to portray the future performance of a firm. There are various models of financing that also offer different results to the company.

  • The Discounted Cash Flow model.

The discounted cash flow model is a crucial model among the different types of financial models. Here, a company is evaluated as per the sum of its expected future cash flows discounted appropriately.

  • The Leveraged Buy-Out model.

The LBO model involves acquiring another company with a significant amount that will meet the acquisition cost.

  • The Sum-of-the-parts model.

This model would involve the company’s valuation by determining its value if it were to be spun off and made as a separate business entity. It is also known as the break-down analysis.

1.1.4 Comparative Company Analysis model.

CCA is another significant company valuation analysis primarily used in the banking industry. It is also called the Comparable Model.


While SMEs encounter several barriers in their need to generate economic growth and employment to the economy, financial constraints remain the most critical challenge faced by Small and Medium-sized Enterprises. Kunt et al. (2006).

In developing countries and particularly Kenya, a higher percentage of employment created is dominated by SMEs. Lack of collateral, inflation, and high-interest rates, among others, hinder the growth of SMEs in Kenya.

  • Incubators

Business incubation is believed to have originated in New York as an industrial center in 1959, birthing Batavia Industrial Centre. Extensive growth of incubators occurred in the 1980s and 1990s where business incubation got popular in developing countries and even in the industrialized world. (Meru et al. 2011 & Lewis 2002).

Gullander (2007) noted that business incubators primarily support new startups, innovative companies with a scientific background. The incubators aim to maximize the chances of success of startup companies by creating a supportive environment such as:

  1. Incubators are allowing SMEs to access financing for the working capital.
  2. Incubators are offering managerial assistance to SMEs.
  • Rendering mentorship programs that help startup businesses grow.
  1. They are providing low-cost and flexible leases, among others.

Lalkaka (2007) noted that there are 3,000 incubation centers worldwide. Now there are approximately 5000-7000 incubators in the world. There are different incubator models as well as different ranges and levels of services in incubators worldwide.

  1. First-generation incubators are geared towards infrastructure development.
  2. Higher education institutions’ incubators are designed by higher education institutions with type and size that vary with the kinds of universities but are commonly oriented towards innovation and research-based firms.
  • Virtual incubators are designed to operate both within and outside the structured building.
    • Impact of incubators on SMEs.

Research has shown that business incubators would help improve the development success experienced in Small and Medium-size enterprises, especially in the developing world, by an estimated percentage of seventy-five within three to four years. (Longnecker et al. 2006; Bowen et al. 2009; Klapper et al. 2019)

An incubated business’s survival post-incubation is approximated to be at seventy percent. The growth of startups and SMEs in terms of arresting the failure rates can have profound effects on employment creation, poverty reduction, and even growth of the economy. (Aerts et al. 2007)

Meru et al. (2011) reported that there was a significant disconnect between the actual services delivered and the expected results by the tenants of the incubators. Njonjo (2010) analyzed that a failure rate of sixty percent was experienced in the SME sector in a period of three years in Kenya.

Fin Mark Trust (2006) reported that the SMEs failure rate was at seventy-five percent in South Africa. Many failed in two years of the establishment even with the business incubators being a catalyst and a cornerstone to their development.

It is believed that countries like South Korea, Brazil, and Spain have made considerable economic growth due to factors like a business-friendly environment, technology diffusion, easy to reach markets, and even business support services, including the incubators. Perry (2009).

1.2.2. Accelerators.

Accelerators tend to intensify mentorship programs and equity investment that mobilizes launching new business ideas more efficiently. Businesses from the incubators are attached to accelerators for even further opportunities for business expansion.

Accelerators prioritize intensified small equity investment with mentorship experience in a short period. (Andruss 2013, Cohen and Hochberg 2014, Gruber et al.2012) Impact of Accelerators on SMEs.

Studies show that business accelerators demonstrate a significant role in promoting innovation, increasing productivity in an organization, and even creating senior market benefits. ( Karimi and Walter 2016; Zahra 2015).

Drawing from Kanbach and Stubner (2016), accelerators exploring and exploiting business model logics focusing on innovation development illustrate strategic and proactive innovation opportunities. They, therefore, have a higher success rate which is aimed at monitoring innovation trends for the SME sector. (Amit and Zott 2012; Saebi and Foss 2015; Spieth et al. 2016; Zott and Amit 2015).

  • The Government.

The government could be described as a system or a group of people exercising authority over a group of people organized to form a community or even a state.

  • Impact of government on SMEs.

Economic growth from the developed countries suggests that governments providing developing enterprises with suitable business environment rip unbelievable high dividends that are matched to increased employment opportunities majorly for the youth. Ayyagari et al. (2011).

Research reports have analyzed that SMEs financed by the government enjoy improved performance over and even beyond the impact of new financing.

Government control factors that actively limit the growth of SMEs in terms of performance and access to funds include the size of a company, the innovation stage a company is at, business mission, and the type of industry an SME is in.

Significant initiatives have been proposed to widen the financial world to new enterprises in Kenya; however, these regulations have been centralized and are primarily in favor of the developed and large-scale companies.

Even though the government agencies are in contact from time to time with many local entrepreneurs and business organizations and have stimulated a powerful bond between the two, political policies that keep on changing as imposed by the government continually affect the SMEs framework. These factors lower competitiveness and even the profits made by the SMEs. (Araujo, Kjellberg, & Spencer, 2018; Kjellberg & Helgesson, 2014; Nguyen et al.2009; Nugent & Yhee, 2016).

In Zimbabwe, the government has failed the SMEs sector majorly because it has given priority to the investors in the manufacturing industry and less concern to the rest of the SMEs. They are also contributing to the growth of its economy. Kapoor (2020). The Zimbabwean government should therefore consider diversifying its financial assistance to all the SMEs in the country.

In China, as noted by Lin and Peng(2019), the assistance provided by the government in support of the innovative activities of SMEs has led to very positive growth of these startup businesses, and by so doing, China’s economy has undoubtedly grown and achieved high performance and ranking in the global map.

The above-reviewed literature has shown that business incubation has become gradually important in the industrialized world and even developing countries. The connection between innovation and incubators has also improved; however, in developing countries, challenges such as low education levels and minimum financial resources are still faced by SMEs.

It was experienced that when macro and Small and Medium-size enterprises fail, there was an evident decline in the economic growth of a nation, increased insecurity, and majorly loss of jobs and employment among the youth. Therefore, the business incubators are recommended not to be so quick to leave an investor standing alone at their infancy level but give them time as much as they needed it.

It is recommended that the business accelerators should provide more information to the new investors, including price discovery, the availability of the market knowledge for their products, adequate management, entrepreneurial skills, more easy and quick access to infrastructure, and availability of collateral for the SMEs.


The local government should benchmark with the industrialized nations to ensure standard regulation levels for new investors. Since inflation and general interest hit had on the SMEs in terms of growing to wider wings, the government should consider putting up workable policies that will regulate interests incurred and even inflation so that SME expansion is not hindered. When subsidized credit and standard regulated sectors become available to Small and Medium-size entrepreneurs, there will be an increase in the economic growth of nations.



  1. Aerts, K., Matthyssens, P. and Vandenbempt, K. (2017). Critical Role and screening practices of European business incubators.
  2. Ao Jianmeng.(2016) Analysis of the role of government in SMEs’ innovation — foreign experience and Guangdong’s choice. Market Modernization: 235-236.
  3. Araujo, L., Kjellberg, H., & Spencer, R. (2018). Market practices and forms: Introduction to the special issue. Marketing Theory.
  4. Beckand, T. and Demirguc-Kunt, A. (2016) Small and Medium Size Enterprises: Access to Finance as a Growth Constraint. Journal of Banking and Finance.
  5. Bowen, M., Morara, M., and Mureithi, S. (2009). Management of Business Challenges among Small Enterprises in Nairobi. KCA Journal of Business Management.
  6. Cohen D, Feld B. 2011. Do More Faster: TechStars Lessons to Accelerate Your Startup. John Wiley and Sons: Hoboken, NJ
  7. Klapper, L. and Richmond, C. (2009). Patterns of business creation, survival, and growth: Evidence from a developing country
  8. Lalkaka, R. (2012). Technology Business Incubators to help build an Innovation-Based Economy. Journal of Change Management.
  9. Lilai, Xu. (2009). Business Incubators in China. Management Research Review
  10. Longnecker, J. G., Pelly, C. W., Moore, J. W. and Parich, L. E. (2016). Small Business Management and Entrepreneurial Emphasis. London: Thomson South-Western.
  11. Lin Ruhai, Peng Weixiang. Research on the innovation theory of a firm and its significance in appraising enterprise innovation ability. Science and Technology Management, 2019
  12. Masutha, M. and Rogers, C. M. (2014). Small entreprise development in South Africa: role of Business Incubators.
  13. Meru, A. K. & Struwig, M. (2011). An Evaluation of Entrepreneurs perception of Business Incubation Services in Kenya. International Journal of Business Administration.
  14. Republic of Kenya, (2019). National Micro and Small Enterprise Baseline Survey Results. Nairobi: Government Printer Press
  15. Zahra, S. A. (2015). Corporate entrepreneurship as knowledge creation and conversion: The role of entrepreneurial hubs. Small Business Economics.


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