Proceedings of Applied International Business Conference 2008
FINANCIAL BOOTSTRAPPING AMONG THE MAURITIAN SMALL MEDIUM SIZED
ENTERPRISES
Padachi K a,ψ, Paddia S b and Seetanah B c
b
a, c
University of Technology, Mauritius
Cargo Handling Corporation, Mauritius
Abstract
The purpose of this paper is to examine the different bootstrapping finance techniques known in the
finance literature (demand side financing) and to determine to what extent Mauritian SMEs use them in
their financing decisions. The traditional sources of finance (supply side financing) are also explored as
well as extent of their use among Mauritian SMEs. The methodology used for this study involves the
collection of primary data through a comprehensive survey questionnaire administered to the owner
manager of firms operating in both the manufacturing and services sector of the Mauritian economy.
Results based on the analysis of data relating to 72 respondents indicate that most of the different
bootstrapping techniques are used to a limited extent; with only a few to a larger extent. Local SMEs
have not yet recognised how bootstrapping techniques, if used effectively, could add value to their
firm. The study also made use of Factor Analysis in order to identify the most important financial
bootstrapping techniques. Results also show a high usage of short term debt and overdraft facilities
while usage of term loans is to a lesser extent. Use of external equity finance is very limited among
those firms and the different sources of external equity probably not understood by many. The findings
also reveal that credit rationing is not common. Predictions of the Pecking Order Theory (POT) seem to
explain the financing choices of owners. The underlying justification for this theory here is that owners
want to keep control of their firm and use personal funds, retained earnings, short term debts and term
loans in order of preference as opposed to outside equity.
Keywords: SMEs; Bootstrap finance; Factor analysis; Pecking order theory.
JEL Classification Codes: G32.
1. Introduction
It is now an established fact that the small business sector is regarded as a fundamental ingredient in the
establishment of a modern, progressive and vibrant economy. Small and Medium-sized Enterprises
(SMEs) represent a powerful engine of growth for the global economy. They are regarded as a high
potential sector for employment generation, poverty alleviation and source of livelihood of millions of
people in both developed and developing countries. Beaver (2002) cited a number of reasons why there
is considerable interest in the creation, management, dynamics and contribution of small businesses
namely:
ƒ small firms help to diversify a nation’s economic base;
ƒ small firms assist in employment creation;
ƒ the establishment of a vibrant and healthy small business sector helps promote an element of
local control and accountability ;
ƒ enterprise development provide a meaningful expression of meritocracy and opportunity ;
ƒ small firms effectively cater for niche markets which large corporations ignore through
strategies of globalisation and
ƒ small firms are the natural avenues for self development and individual achievement, being
the natural expression of entrepreneurship.
ψ
Corresponding author. Padachi K. University of Technology, Mauritius. Corresponding author Email:
[email protected]
Proceedings of Applied International Business Conference 2008
Tinnier firms – micro enterprises – frequently get more attention, as donors seek to help the very poor;
the recent Nobel Peace Prize awarded to Muhammad Yunus of the Grameen Bank visibly demonstrates
the emphasis given to this approach. But the type of support inherent to microfinance lending is
generally ill-adapted to serving their slightly larger, and arguably more dynamic, cousins, the SMEs
(De Ferranti and Ody, 2007). Their role in building a solid industrial base can be gauged from the fact
that they account for more than 95% of manufacturing enterprises and an even higher share of many
service industries in OECD countries. However, in developing countries, the SME picture varies
greatly. Whilst SMEs contribute on average 51.5% of Gross Domestic Product in high income
countries, they contribute only 15.6% in low income countries. SMEs worldwide on average face
financial constraints as the second most severe obstacle to their growth, while large firms on average
place financial constraints on the fourth position (OECD Reports).
Today, SMEs are at crossroads. The process of globalisation that is the opening of economies, the
dismantling of trade barriers and the introduction of new products has jeopardised the competitiveness
of SMEs, rather than creating opportunities. SMEs are particularly vulnerable to such volatile
development because of their low resource base. In Mauritius, the Government believes that the SME
sector can be an effective vehicle for longer term job creation, for broadening the circle of
opportunities, for poverty reduction and for lifting the economic, financial and social status of the
unemployed and the working poor. The Mauritian Government, in its help to boost the SME sector is
extending as well as increasing its various grant/loan schemes in existence e.g. Booster Loan Scheme,
Quasi Equity Scheme, SME Partnership Fund, University SME Partnership Programme and DBM
Equity Loan Scheme among others. Around 5,600 SMEs, employing 27,000 persons, have been
registered with the Small Enterprises and Handicraft Development Authority (SEHDA) as at end of
2007 and 1,500 new units have been set up during the last two years; generating some 3,000 jobs
(Business Magazine, 2007).
Finance has generally been recognised to be an important element in the creation and development of
small and medium sized enterprises (SMEs). This has captured the attention of our politician
worldwide. However, financing in the context of SMEs should be viewed in two distinct approaches; a
demand side approach and a supply side one. Financing is necessary to help SMEs set up and expand
their operations, develop new products, invest in training of staff and production facilities. Many small
businesses start out as an idea from one or two people, who invest their own money and probably turn
to family and friends for financial help in return for a share in the business, Microsoft being a classic
example. But if they are successful, there comes a time for all developing SMEs when they need
investment to expand or innovate further. If SMEs cannot find the financing of their need, brilliant
ideas may fall by the wayside and thus represents a loss in potential growth for the economy (OECD
Policy Brief, 2006).
The study will therefore focus on how entrepreneurs/small business managers/owners maximise their
usage of internal and external resources in their drive to finance their firm. As it is known, there are
various traditional sources of finance for the small business or SMEs ranging from bank loans,
overdraft, own funds/savings, loan from family/friends and equity funding. However, there exists also
non traditional sources of finance which could be well utilised by the entrepreneurs in the financing of
their business, which has been described by many researchers as “bootstrapping finance”.
Thus the study objectives are to identify and analyse the different methods of bootstrapping finance
available and to determine whether those methods are known and used by SMEs’ owner managers in
Mauritius. Though bootstrapping techniques are as old as the traditional theory of finance,
entrepreneurs, however, often ignore their importance or may be using them unconsciously. The
majority of such a study has been undertaken for large developed and developing economies, such as
US, Sweden and to our knowledge there has been no such study for a small island economy as
Mauritius. Therefore this study will be an attempt to bridge that gap and to contribute to the existing
literature on finance and in particular, bootstrapping finance.
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Proceedings of Applied International Business Conference 2008
The empirical findings will also confirm whether or not the theoretical framework of financing viz the
Pecking Order Theory (POT) is valid while explaining the demand for finance. The findings are
expected to provide further insight into the ways entrepreneurs view the financing aspect of their
businesses.
2. Literature Review
The Pecking Order Theory
The theoretical basis for research on the capital structure of SMEs originates in corporate finance
theory. Though they may not be directly applicable in the SME sector, they do allow formulating
testable hypothesis on the financing decisions of SMEs. The POT of financing was proposed by Myers
(1984) and Myers and Majluf (1984). According to this theory, due to information asymmetry between
investors and managers, investors face an adverse selection problem and demand a premium that raises
the required rate of return on external capital. Therefore, firms prefer internal to external finance, and
when external funds are necessary, firms prefer debt to equity finance as a last resort. Empirical
evidence suggests that the POT holds for large corporations. Only few researches have applied the POT
to SME’s and the empirical evidence concerning the applicability of the POT to SMEs is mixed (Cosh
and Hughes, 1994; Paul, Whittam and Wyper, 2007)
POT also explains the demand side explanation of finance gap in that SME owners are extremely
reluctant to relinquish control of their businesses (Le Cornu et al., 1996). Bhaird and Lucey (2006)
argued that the sources of finance used by SMEs can be delineated by internal and external sources and
viewed through a life cycle model, which depicts that as a firm experiences changes in its development,
its access to finance and its capital structure also changes with time. Small, young firms tend to draw
capital from internal sources, personal sources, informal investment and family and friends. As the firm
ages and develops a reputation, the problem of asymmetric information is attenuated and it gets access
to short term sources of funding like trade credit and bank overdraft facilities. As the firm gets larger
and older, it increasingly sources external finance from financial institutions and its debt level increase.
However, the firm’s borrowing requirements and its debt as a percentage of total assets decline as
retained earnings accumulate over time (Diamond, 1991).
Credit Rationing Theory
According to existing literatures, banks are unwilling to lend to small businesses on a long term basis
because of the high risks and costs associated. Consequently SMEs often run into problems because
they find it harder than large businesses to obtain financing from banks, capital markets or other
supplies of credit and this is termed as a financing gap (OECD Policy Brief, 2006). According to the
Credit rationing theory, a firm’s capital structure reflects the lender’s strategy for profit maximization
whilst the theory of capital structure deals with the borrower’s strategy for devising an optimal debt
level. Ramnath (2006) in his study on credit rationing for SMEs in Mauritius indicates that 52% of
SMEs faced rationing from commercial banks.
Information Asymmetry
According to Cosh and Hughes (1984), information asymmetry between financiers and small business
managers lies at the root of the explanation of the financing gap. Information asymmetry refers to a
situation where the economic agents (i.e. the SME owner manager and finance providers) are not all
equally well informed. Information asymmetries generate agency problems and associated monitoring
costs. They also encourage banks to require collateral to offset the greater risk involved. In the music
industry, one might expect the agency costs of monitoring the often complex royalty chains within the
pursuance of a particular contract (and possibly moral hazard) to be the most important type of
information asymmetry (Banking On a Hit, 2001). Berger and Udell (1998) suggest that the most
important characteristic of small business finance is “informational opacity,” such that small firms
cannot credibly convey their quality.
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Proceedings of Applied International Business Conference 2008
Internal Resources
Competitive advantages could be achieved by the business by resource configuration strategy (Barney,
1991). Hamilton and Fox (1995), in their work on the financing preferences of small firm owners,
stated that the supposed gaps in the supply of finance to small firms might be in part the consequence
rather than the cause of financing decision of the business owners. The authors cited Coopers and
Lybrand (1993) which attributed most failings in the capital market to small firm owners rather than the
suppliers of funds. Hence, management’s beliefs and desires will play an especially important role in
determining capital structure and models must include the role of management preferences, beliefs and
expectations if one is to better understand capital structure policy. While assessing the role of the
owner manager of the small business in capitalising on use of internal resources in order to avoid using
external finance, Howorth and Wilson (1998) cited for example that best practice in credit management
emphasizes the pre-scale elements of the process for example keen awareness of customer base,
purchasing habits, risk and establishing payment terms prior to sale. They also indicated that post sale
invoicing should be accurate and prompt. Customers should be contacted before payment is due to
ensure that the invoice has been received. This illustrates one example of how internal resources are
being harnessed as part of the overall financing strategy of the business. Along the same line Cosh and
Hughes (1994) affirmed that the POT applies to small business in the sense that small firms will choose
extended trade credit along with other short term finance after retained profits, but in preference to long
term debt or equity.
Resource-Based Theory
Winborg and Landstrom (1997) cited the resource-based theory whereby a business competitive
advantage is anchored in the business possession of idiosyncratic costly to imitate resources. They also
recommended that one need to broaden the focus when discussing small business finance, from the
rather narrow ‘capital’ focus to a focus encompassing the resources needed. In this extended context,
concepts like networks, strategic alliances, use of resources, cooperation and trust may become central.
Winborg and Landstrom (1995) stated that cooperation, the person to person exchange, has allowed
businesses’ founders to deploy or leverage their tangible and intangible assets for more space, a wider
variety of equipment, expanded capacity, greater purchasing power, better negotiated terms and larger
customer bases. Thus borrowing equipment, shared staffs and facilities have been used for years by
businesses. Researchers have also shown that through coordinated procurement, businesses have had
better bargaining powers with suppliers which have resulted in better quality products, prices and
delivery periods. Neeley (2002) found that customers have often gone to entrepreneurs with whom
their business experience has been good and asked for referrals for other types of services or
merchandise. Clients are therefore shared and cooperating businesses are promoted within the informal
alliances.
Bootstrap Finance - A Definition
Small business owners should not only rely solely on financial institutions and government agencies
for capital. Instead, the business itself has the capacity to generate capital. This type of financing, called
bootstrap financing, is available to virtually every small business and encompasses factoring, leasing,
use of credit cards and managing the business frugally. Different researchers have put forward a
particular definition and some of them are as follows:
a. launching ventures with modest personal funds; (Bhide, 1992)
b. highly creative ways of acquiring the use of resources without borrowing money or raising
equity
c. financing from traditional sources. (Freear, Sohlt and Wetzel, 1995)
d. the sale of the entrepreneurs’ personal properties, and personal indebtedness added to the mix
of bootstrap methods.( Neeley and Van Auken, 1994),
e. quasi equity, outsourcing, foundation grants could be added to the list of techniques. (Bhide,
1992; Freear et al., 1995; Harrison and Mason, 1997 and Winborg and Landstrom, 1997).
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Proceedings of Applied International Business Conference 2008
InfoDev (2006) argued that bootstrapping, i.e. making use of savings, investment from friends and
family and retained earnings is by far the most common strategy with successful technology
companies. Lahm and Little (2005) described bootstrapping as a creative financing strategy and
expanded on two methods of bootstrapping. Those two methods include the acquisition and control of
resources (both tangible and intangible), and the efficient uses of those resources to finance the
enterprise for growth. According to the authors bootstrapping is entrepreneurship in its purest form and
is the transformation of human capital into financial capital.
Forms of Bootstrap Finance
Firestone (2003) listed several sources of bootstrap finance which include soft capital (capital from
relatives), home equity loans, government loans and grants, future customers and suppliers, strategic
partners, micro capital lending, rights fees and sales, patents, consulting contracts, leasing, factoring,
vendor financing, sponsors, trading activities, credit cards, business plan competition, extracting
upfront value from your lease for office space, negative pledge of assets, co- guarantor and collectible
auctions.
Neeley (2002) examined the techniques for bootstrap finance and the various sources thereof. The aim
of his paper was also to demonstrate the recent use of those techniques in the United States and the
benefits that bootstrap finance has provided to entrepreneurs who aimed to start, expand or maintain a
fiscally healthy business. Neeley (2002) stated that bootstrap finance methods encourage business
owners to exploit personal resources, utilise short term borrowings, request funding from relatives,
barter for services, acquire money through quasi-equity arrangements, cooperate for better customer
access, manage assets effectively, outsource production, seek subsidies and grants. It was also found
that business owners’ needed support was secured by social assets, which included obligation, trust,
gratitude, liking and friendship rather than monetary payments.
Windborg and Landstrom (1997) identified 19 bootstrapping measures which aim at minimizing the
need for capital and 13 measures used in order to meet the need for capital. Among the first group of
measures are: buy used equipment instead of new, borrow equipment for shorter periods, hire personnel
temporarily, coordinate purchases with other business, lease equipment, practice barter, offer customers
cash discounts, buy on consignment from suppliers, speed up invoicing, use interest on overdue
account, cease business relations with late customers, offer same conditions to all customers, employ
relatives/friends at below market salary, run the business at home, share premises, share equipment.
The second group comprised mainly of negotiating best terms from suppliers, deliberately delay
payment to suppliers, withholding managers and owner’s salary for some period, obtaining capital via
managers’ assignment in other businesses, obtaining payment in advance from customers, raising
capital from a factoring company, obtaining loan from relatives/friends, delaying payment of VAT,
obtaining subsidy and grants. Lahm and Little (2005) broadly addressed four types of bootstrapping
options i.e. bootstrapping product development, bootstrapping business development, bootstrapping to
minimise the need for outside capital financing and bootstrapping to minimize the need for capital as
identified by Freear, Sohl, and Wetzel (1995) and Winborg and Landstrom (1997).
Consequently entrepreneurs should consider the techniques to utilise effectively resources available
and learn more about them especially in cases of constraints to access bank finance. Chiniah (2006) in
his appraisal of the critical success factors for SMEs in Mauritius with emphasis on the Textile and
Garment Sector showed that SMEs face constraints in accessing bank finance. The author cited the
GFA Management Consultant’s survey done in Mauritius (April 2001) which confirmed that SMEs’
development is restricted by inadequate access to finance due to high interest rates, high collateral, lack
of trade finance instruments and other influences of the finance market. The Consultant recommended
among others, the launching of a grant scheme to finance participation of SMEs in trade fair abroad,
establishment of a micro credit bank to facilitate access to cheap finance, establishment of a Research
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Proceedings of Applied International Business Conference 2008
and Development unit at SMIDO (renamed now as SEHDA), promotion of cluster building, forward
and backward integration and strategic alliances where appropriate. In addition, they recommended the
establishment of a database for all information related to start ups (partner search, premises, supplies,
matchmaking). All these indicate that there are other ways and means by which firms could mobilize
resources for use.
3. Methodology
This section describes the methodology adopted to assess the extent that Mauritian firms used
‘bootstrapping techniques’ to meet their financing requirements with special emphasis on the utilization
of internal and external resources called bootstrap financing. The review of the literature illustrated
well the different techniques of bootstrapping a business can tap and particularly what falls under
bootstrapping. The latter needs therefore to be studied in the Mauritian context to identify whether
those techniques are adopted regularly and felt necessary by Mauritian SMEs. However studies that
examine bootstrapping may be limited by the lack of a widely accepted definition and identification of
sources of bootstrapping. A generally accepted definition would lead to a consistent use of bootstrap
sources of finance in empirical studies.
The different bootstrap techniques listed were based on the study by Winborg and Landstrom (1997).
Studies of this kind have been predominantly survey based and was therefore found to be appropriate
for this study. The main purpose was therefore to find out whether the different bootstrapping methods
as defined in this study are currently being used and to what extent in the financing decisions of SMEs.
Relationships, if any, will be determined through statistical techniques between, for example, the
characteristics of the business in terms of age, size, line of business and the different types of financing
resources used including the traditional sources as well as the different bootstrapping measures
Being given the smallness of the SME sector in Mauritius and the fact that Mauritius is a small and
developing country, it is felt that the major sources of finance will be bank sources and own funds.
However the impacts of the usage of own funds and the other techniques of bootstrapping need to be
empirically determined. Unlike other jurisdiction, there is no available national survey which
researchers can draw from for their research, thus own sampling frame had to be devised. Two lists of
SMEs are available at the SEHDA; one list representing manufacturing firms ( 943 units) and food and
beverage business ( 219 units) and another unsorted list comprising 2,216 units including
manufacturing, trading, handicraft, services and I.T business. However given that not all SMEs are
registered with the SEHDA (compare to CSO figures for large businesses i.e. > 10 employees), it was
necessary to supplement the SEHDA list with additional firms. This population was supplemented by a
population of firms from the Yellow Pages of Mauritius Telecom and representing the abovementioned
sectors.
Research, using comprehensive survey is not common among the Mauritian business community and
to administer a sufficient large sample is almost impossible.
Therefore an initial sample of only 250 firms has been chosen, 125 from the SEHDA lists and 125 from
the Yellow Directory. The sample covers firms from the manufacturing, retailing and services sector.
For the purpose of this survey, it is felt that more weight should be given to manufacturing, trading and
services sectors given that those sectors are representatives of the SME sector in Mauritius. On the
other hand the handicraft and fast food businesses (except large businesses) are more of a micro
enterprise nature and thus might not be relevant to this study. As pointed above, the firms have been
chosen randomly from the lists available at SEHDA and from the Yellow Directory. However the
absence of a proper population of SMEs has been a hindrance in choosing proper strata and using for
example SPSS to obtain a random sample. The 250 questionnaires in the first stage were sent by post in
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early December 2007, including a self addressed stamped return envelope. In order to improve the
response rate, a follow up was made by phone call for a meeting for the filling up of the questionnaire.
Problems encountered during data collection
By end of December 2007, only eleven replies were obtained representing a response rate of only 4.4%
which was very low. Twenty five envelopes were returned “Undelivered / Gone Away”. It was
therefore necessary to follow up with the firms or persons through telephones for responses. Eighteen
additional forms were received, though some had missing information. As a last resort an appointment
was sought for the filling of the questionnaires. That exercise was very tedious in view of the large
numbers and especially when the person was not interested. Many simply refused the meeting on the
ground that they were not interested. Table 1 below shows a drop out analysis:
Table 1: Drop out analysis
Sector
Sample
Manufacturing
62
Trading/Retail
Number of answers
Effective response
Response rate (%)
21
20
32.2
75
17
17
22.6
Fastfood /Restaurant
14
6
6
42.8
Services
50
15
15
30.0
I.T hardware/services
30
7
7
23.3
Handicraft
19
7
7
36.8
Total
250
73
72
28.8
The Statistical Package for Social Sciences (SPSS) Version 16.0 software was used as statistical tool
for analysis of data collected. 72 fully completed questionnaires were verified and input. Univariate,
multivariate and regression analysis were carried out. Factor Analysis was used as a data reduction
technique to identify the group of variables which could be used to label specific bootstrapping
financing techniques adopted by our local SMEs.
4. Results and Discussion
Descriptive Data
Table 2 and 3 give descriptive statistics about the sample firms age, sales level (proxy for size) sector
and ownership structure. The sample firms are evenly spread in the age distribution bracket. Small
firms represent a bulk of the business stock and as per the CSO 2007 bulletin, firms employing up to 9
employees outnumber those employed 10 and above, the threshold used for compiling statistical data
on the Mauritian business stocks. In line with the national statistics on the SMEs population, the
sample distribution of companies by size is positively skewed: 77% had up to 10 employees, while
only 4% employ above 50 employees (Table 4). The size of the companies in terms of sales is in the
range of Rs500,000 to Rs10,000,000 for above 60% of the respondents.
Table 2: Age of Business and Level of Sales
Frequency
18
Percent
25.0
Panel B: Sales
< 500,000
Frequency
13
Percent
18.1
3 to <10 years
19
26.4
37.5
18
25.0
> 500,000 - 2m
> 2m - 10m
27
10 to < 15 years
18
25.0
15 years and above
17
23.6
> 10m - 50m
13
18.1
100.0
>50m
1
1.4
Panel A: Age
0 to < 3 years
(n=72)
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Table 3: Sector Grouping and Business Legal Entity
Panel A: Sector
Manufacturing
Frequency
31
Percent
43.1
Panel B: Legal Entity
Sole trader
Frequency
17
Percent
23.6
Retailing
17
23.6
65.3
24
33.3
Limited Company
Partnership
47
Services
Total
72
100.0
Total
8
72
11.1
100.0
Table 4: Full Time Employees
Full time Employees in
company
Minimum
Maximum
Mean
Std.
Skewness
Statistic
Statistic
Statistic
Statistic
Statistic
Std. Error
0
50
9.50
12.788
2.305
.283
N=72
Nearly 88% responding to the survey are males. 55% of the respondents have studied up to secondary
level while 29.2 % have tertiary education. Only 2.8% have studied up to primary level and 12.5%
have vocational/ technical education. The majority of the companies (68%) are family-owned business
though more than half do not involve anyone in the decision making process. A significant difference
was found in the sales level of companies and in the age bracket (Pearson Chi-square = 24.285, p-value
=0.019). This provides supports to previous research that suggests small firms tend to adopt lifestyle
rather than growth strategies. The sample was spread across three main sectors and the private limited
company is predominant in the ownership structure.
Bootstrapping Measures/Techniques
The uses of the different bootstrapping techniques have been analysed. The sampled firms use to a
varying extent the different techniques consciously or unconsciously in their daily businesses.
However, what is important is for them to harness those uses to their advantages in order to create a
lean organization and be more efficient. Appendix A depicts the uses of the different bootstrapping
methods by the 72 firms which replied to the survey. Extent of use has been determined on a 5-point
Likert scale of 5 as ‘Very Often’ to 1 as ‘Not at all’.
The different techniques of bootstrap finance as illustrated in Appendix B are all being used to a certain
extent. The sixteen most common (i.e. more than 50% in use) bootstrapping measures used to meet the
need for capital are the following: negotiates with suppliers for best quotes (mean rating of 4.4), use
personal skills (4.1), buy materials in bulk (3.7), check whether invoices have been properly received
by clients (3.4), remind customers for payment (3.4), use own personal funds (3.2 ), suppliers’ credit
(2.9), use of technology to cut costs(2.9), keep minimum inventory (2.7), early invoicing (2.8), stop
service to bad customers (2.6), seek advance payment from customers(2.6), finance from family (2.5 ),
use of temporary workers(2.4 ), granting discount to customers (2.3) and coordinate purchases with
other businesses (2.3). Results from Neeley (2002) indicate that prompt invoicing was most often used
along with cash or management account, trade credit, owner’s funds, outsourcing, lease and barter. In
Windborg and Landstrom (1997), the first group of bootstrap measures were buy used equipment,
borrow equipment, hire temporary personnel, coordinate personnel, lease , barter, offer discounts, buy
in bulk and speed up invoicing.
Traditional Sources of Funds
Table 5 shows the different sources of internal and external funds usually available for financing of
business. In line with the POT, the two most common internal funds are retained earnings (mean score
3.94) and own personal funds (3.21). At the next hierarchical level, it is not uncommon to establish that
bank financing will constitute the preferred methods of financing for the small and medium enterprise
as compared to other means of external capital. The reason is due to the desire of the owner to maintain
control of his/her business.
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Table 5: Sources of Funds
Panel A: Internal Sources
Mean
3.21
Own personal funds
Panel B: External Sources
Mean
Short term Bank loans
3.47
Use of retirement funds
1.39
Medium/long term bank loans
2.85
Personal indebtedness
2.00
Debenture issue
1.10
External Capital
1.11
Venture Capital
1.07
Business Angels
1.18
Government Grants/Subsidies
1.15
Micro lending (seed up capital)
1.14
Franchising
1.08
Business partner's capital funds
Business retained profits
Finance or loan from family members
Loan from friends
Loan from business partners
1.79
3.94
2.46
1.25
1.47
Withhold salaries for self, family and/or partner
2.08
(n=72)
The sampled firms have a high preference for bank overdraft and short term loans facilities (mean of
3.5). This conforms to Tucker and Lean (2003) in that small firms place great importance on the
flexibility offered by short term debts. The use of medium / long term loans constitutes 74% of
financing as compared to 94% for business retained profits and 86% for overdraft facilities. This
finding is congruent with that of Diamond (1991) which found that a firm’s borrowing requirements
and its debt as a % of total assets decline as retained earnings accumulate over time. The result of the
present survey indicates that though bank finance constitutes an important element in the financing
decisions of SMEs, however, in preference to long term loans or other external sources, business
retained profits are mostly used along with other internal sources of financing. The mean rating for the
use of the different sources of finance are as follows: retained profits (3.9), own funds (3.2), finance
from family and friends (2.5), overdraft and short term loans (3.5), medium and long term loans(2.9),
debentures(1.1) and external capital(1.1). This accords well with the POT i.e. the entrepreneur will use
his or her own and/or family funds, business retained profits and short term loans funds in priority to
long term loans and external capital for finance. There is little support for external capital viz. external
equity, venture capital or business angel among Mauritian SMEs as was the case in Surrasqueiro and
Duarte (2006) whereby the main equity sources were retained earnings, personal savings, owners’
loans, funds from family and friends and public support. The results are also supportive of those of
Tucker and Lean (2003) where there was little support for quasi commercial (QCOM) sources of
finance i.e. venture capital, business angels, government grants.
Correlation Analysis
Retained earnings and age of firm
As a firm age it will tend to use retained earnings as a major source of finance in preference to other
external sources of funds. The contingency table at Appendix B shows that there is a positive
association (Pearson Chi-square = 26.716, p-value = 0.008) between the firm’s age and the use of
retained earnings. This can be explained by the fact that with time a firm gathers funds in the form of
undistributed profits and is thus available for financing the business. In order to check the strength of
the association the symmetric measure of Phi and Cramer’s V values are .609 and .352; meaning there
is an association between the two variables. Spearman’s Rho Correlation Analysis showed that there is
a positively significant relationship between age and use of retained earnings.
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Proceedings of Applied International Business Conference 2008
Sales level and long term debts
Along the same line, it is expected that as the firm’s level of sales increase, its ability to access external
financing in the form of loans may become easier. However, in practice larger SME firms may not use
long term debts to a large extent because of their preference to use retained earnings instead. The
significance of the correlation coefficient rejects the null hypothesis and this implies that as the size of
the business increase as measured by sales, the owner is more likely to use internal funds. This is in
contradiction to the life cycle model of Bhaird and Lucey (2004) in that as a firm gets larger it sources
external finance from banks and its debt level increases. However the results are conformant with those
of Diamond (1991) i.e. the firm’s borrowing requirements and its debt level as a % of total assets
decline as retained earnings accumulate over time.
Sales Level and use of personal funds
The entrepreneur at the start of his business will utilize mostly his own personal funds as capital.
Clearly at the start there will be no distinction between the owner and the business as personal funds
are injected. However as the firm’s sales level grow, revenue generated will replace the owner’s
personal funds as sources as capital. Consequently it is expected that there is a negative relationship
between use of personal funds and annual sales. The contingency table confirms the relationship and
the result is significant (Chi-square = 29.572, p-value = 0.020). Spearman rho correlation is -0.478 at
the 1 % level of significance as showed at Table 6.
Table 6: Correlations Matrix
Spearman Correlation
Age of business (A)
Internal means used:
Business retained profits
Average annual sales
External means used:
Medium/long term bank
loans
Internal means used:
Own personal funds
Correlation Coefficient
A
1.000
Sig. (2-tailed)
.
B
C
D
E
.256(*)
1.000
.030
.
Correlation Coefficient
.405(**)
.231
1.000
Sig. (2-tailed)
.000
.050
.
Correlation Coefficient
.384(**)
.135
.168
1.000
Sig. (2-tailed)
.001
.257
.157
.
-.286(*)
-.109
-.478(**)
-.161
1.000
.015
.361
.000
.176
.
72
72
72
72
72
Correlation Coefficient
Sig. (2-tailed)
Correlation Coefficient
Sig. (2-tailed)
N
* Correlation is significant at the 0.05 level (2-tailed).
** Correlation is significant at the 0.01 level (2-tailed).
The correlation matrix reveals that there is a significant adverse relationship (at 5% significance level)
between age of firm and use of own personal funds while the relationship between age and use of bank
loans is positive and significant at 1% significance level. Finally the relationship between use of long
term loans and age is significant and positive at 1% significance level.
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Proceedings of Applied International Business Conference 2008
Factor Analysis
The study makes use of factor analysis, a data reduction technique in order to identify groups of
financial bootstrapping measures among the Mauritian SMEs. The final factor solution as given at
Table 7 comprises of 15 variables. The Kaiser-Meyer-Olkin measure is 0.571 (i.e. > 0.5) and Barlett’s
Test (0.000), implying that a factor analysis is meaningful. Only factors with an Eigenvalue over one
were considered for further analysis, which resulted in six factors which accounted for 72.31% of total
variances.
The six factors were given the following descriptive labels:
Factor 1:
Minimise WCR
Factor 2:
Use of Trade Credit
Factor 3:
Post AR Management
Factor 4:
Pre AR Management
Factor 5:
External Facilities
Factor 6:
Minimum investment in FA
Table 7: Bootstrapping Techniques: Rotated Component Loadinga,b
Component
1
2
3
4
5
Outsourcing of activities
.797
Leasing/hiring/rental
of
.760
equipment/building
Advance payment from Customers
.357
.677
Early
payment
discount
to
.768
Customers
Delay payment to suppliers
.315
.730
Stop service to late payers
.738
Charge penalty for late payment
.896
Remind customers for early payment
.873
Check invoice whether received by
.873
customers
Buy materials in bulk
.729
Buy second hand equipment instead
.306
.441
of new
Borrow equipment instead of buying
Negotiate with supplies for best
quotes
Owners' skills/Social contacts to get
.620
best terms
Coordinate purchases with other
businesses
.608
6
.509
.861
.730
.490
-.358
.512
Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser Normalization.
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Proceedings of Applied International Business Conference 2008
Total variance explained (rotated loadings)
Percent of variance
14.30
Cumulative % of variance
14.30
Eigenvalue
3.054
Scale reliability analysis
Cronbach’s alpha
0.657
a
b
13.46
27.76
2.422
0.591
12.08
39.86
1.603
0.660
11.86
51.70
1.490
10.68
62.38
1.154
9.93
72.31
1.123
0.814
0.483
0.430
Kaiser Meyer Olkin measure of sampling adequacy = 0.571
Bartlett test of sphericity = 246, significance level = 0.0000.
The different factors (Table 7) are the following: Factor 1 includes variables regarding means to
minimize working capital requirements and include the variables to meet the needs of the business in
terms of capital, while Factor 2 relates to trade credit and getting the best deals from suppliers and
comprises variables such as negotiating best terms from suppliers and buys stocks in bulk. Factor 3
and 4 relate to the both pre and post accounts receivables management and in particular penalisation of
bad customers and consequently are measures to stop wasting resources allocated to them. Factor 5
relates to measures where the use of external facilities is considered to ease the pressure on cash flow.
Factor 6 has the objective of reducing investment in fixed assets where the firms would consider
borrowing equipment instead of buying.
5. Conclusions and Policy Implications
The uses of the different bootstrapping techniques identified are more or less in line with the findings
of studies reviewed at section 2, though some of the practices are far behind to become a reality to the
local SMEs. Those firms use to a certain extent the different techniques consciously or unconsciously
in their daily business. However what is important is for them to harness those uses to their advantages
in order to create a lean organisation and be more efficient.
The relatively low usage of some of the bootstrapping techniques may indicate a lack of awareness of
how to harness the usage of same in the financing decisions by the entrepreneurs. For example, funds
from family members and friends can be a cheaper source of finance as compared to bank financing.
However cultural factors or a lack of initiative prevent many entrepreneurs from choosing this facility.
The reverse is true for family members or friends who can gain a better bargain or even a share in a
business by simply lending to their peers. The low proportions of use of outsourcing and usage of
temporary employees illustrate that the labour market in Mauritius is not as flexible as it should have
been and the outsourcing market is not well developed. The low proportion for coordinating purchases
with other businesses also indicates the absence of synergy in the small business community. Use of
short term and overdraft facilities are very common among the respondents as opposed to longer term
loans. This may show that SMEs are using expensive sources of finance in terms of interest and bank
charges.
On the other hand uses of external sources of finance i.e. external equity are not common among local
SMEs. Use of business retained profits is high indicating plough back of profits in lieu of dividends.
The present study also confirms that as a firm age it uses retained profits to a larger extent in its
financing decisions. Conversely as the firm gets larger in terms of sales there is not enough conclusive
evidence that it uses more long term debts. However it is confirmed that the use of personal funds
decreases. As opposed to the supply side theory of financing, the demand side focused more on how
the SME owners harnesses the different internal and external bootstrapping techniques available to
meet the need for financing the enterprise. Though those techniques are known and used either
consciously or not, they can represent added value to the firm if used consistently and effectively.
Bootstrapping techniques should become the focus of future research in Mauritius in order to add to the
theoretical literature of demand side financing. Future research should focus more on unstructured
interviews to gain better insight on the extent of financial bootstrapping techniques. Only 12% of the
respondents are female entrepreneurs or managers in charge of the business.
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Proceedings of Applied International Business Conference 2008
It can thus be deduced that more women are in micro business sector instead and the present
government policy is to empower women through the Women National Council (WNC) will take some
time for the women entrepreneur to break through the many barriers. The low level of owners studying
up to tertiary level is reflected in the lack of interest of owners in financial planning i.e. for example in
usage of costing reports,budget and investment plans (47% and 26% respectively). This is an area
worth investigating by the support institutions and should attract the attention of government in its
drive to make the SME sector becomes a real engine to economic growth.
The Factor Analysis in this study can be further empirically studied to determine their impact on the
financial situation of the firm. This could reveal, for example, how finance is handled in small
businesses as opposed to large ones. Moreover the contribution of the owner in terms of his or her
involvement needs to be assessed further both financially and non- financially (in terms of core
competency). According to Windborg and Landstrom (1997), the resource based theory needs to be
developed further on the basis of the characteristics of the small business in order to understand the
way resources are handled. This could help in, for example, improving the Government financial
programme to the SME sector.
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Appendix A: Use of bootstrapping measures
Measure
5
4
3
2
1
%
13
59
38
Total in
use
59
13
34
82
18
47
Mean
rating
3.2
1.4
2.0
Own personal funds
Use of retirement funds
Personal indebtedness incl. credit card debt
20
2
4
11
2
7
18
5
12
10
4
11
Finance or loan from family members
Loan from friends
Loan from business partners
Withhold salaries for self, family and/or partner
9
1
2
8
15
1
4
7
7
4
5
9
10
3
4
7
31
63
57
41
41
9
15
31
57
13
21
43
2.5
1.3
1.5
2.1
Outsourcing of activities
Use of temporary/ seasonal employees
Leasing of equipment/building
Sale and leaseback arrangement
Factoring of trade debtors
Early invoicing of customers
Seeking advance payment from customers
5
5
5
3
3
15
10
8
15
11
0
1
14
14
14
14
10
3
1
10
12
5
10
4
4
3
5
10
40
28
42
62
64
28
26
32
44
30
10
8
44
46
44
61
42
14
11
61
64
2.1
2.4
2.1
1.3
1.3
2.8
2.6
Granting discount to customers for early payment/ cash
payment
Delay payment to suppliers
Use of barter system
Keep minimum inventory
Stop service to late payers
Charge penalty for late payment
Remind customers for early payment
Check whether invoice properly received by customers
6
10
12
12
32
40
56
2.3
8
1
7
9
3
15
19
12
0
15
14
4
24
20
28
3
18
13
3
17
15
13
4
12
12
6
4
7
11
64
20
24
56
12
11
61
8
52
48
16
60
61
84
11
72
67
22
83
84
2.9
1.2
2.7
2.6
1.5
3.4
3.4
Buy materials in bulk
Buy second hand equipment instead of new
18
6
26
10
12
5
8
11
8
40
64
32
89
44
3.7
2.0
Borrow equipment instead of buying
Use of Technology to cut costs (e.g. software packages
for invoicing, processing, web hosting, use of
electronic payment)
2
15
2
14
2
15
5
7
61
21
11
51
15
71
1.3
2.9
Negotiate with suppliers for best quotes
Use of own skills/social contacts to get best business
terms
Coordinate purchases with other businesses
48
40
15
18
3
5
0
1
6
8
66
64
92
89
4.4
4.1
10
18
13
6
35
37
51
2.3
Any other technique
3
1
1
3
64
8
11
1.3
Sources
Appendix B: Extent of use External Funds
5
4
3
2
1
Total in use
%
Mean
Short term loan/ Overdraft facilities
26
11
16
9
10
62
86
3.5
Medium/ long term loan
10
17
16
10
19
53
74
2.9
Debenture
External capital
Venture capital
Business Angels
Government Grants
Micro Lending
Franchising
0
0
1
1
1
2
0
0
1
0
1
1
0
0
2
2
0
0
0
0
3
3
1
1
3
3
2
0
67
68
70
67
67
66
69
5
4
2
4
4
4
3
7
6
3
6
6
6
4
1.1
1.1
1.1
1.2
1.2
1.1
1.1
877