Question

Why don’t small businesses make greater use of the direct credit markets since these markets enable firms to finance themselves at very low cost?

please, I need a new answer .. and no handwriting.

Answer 1

Direct credit markets refer to the markets where businesses, companies and government issues credit instruments such as bonds, shares, derivative instruments, credit instruments etc for investors and lenders to subscribe to. Thus this a platform where providers of capital (banks, lending institutions, investors etc) meet the entities desirous of capital (companies, corporations, businesses etc).

Small businesses are not able to make greater use of the direct credit markets because:

1. Direct credit markets are more service oriented towards servicing large and stable businesses and companies
2. Ticket size (credit requirement) of the small businesses is not attractive enough for direct credit markets as their threshold is much larger
3. Cost of accessing the direct service markets is more due to issuance cost, floatation cost, cost of intermediaries such as investment banks, rating agencies. Small businesses are not always in a position to absorb these costs.
4. Large transaction costs over small ticket size of requirement makes the cost of funds expensive for small businesses.
5. Small businesses are usually characterised by state of start up, volatile cash flows, lack of profitability, riskiness of cash flows, lack of stability in cash flows, lack of maturity in the stage of companies - these are not attractive to credit providers. Hence direct credit markets are not able to cater to the needs of small businesses.