WOLAITA SODO UNIVERSITY

COLLAGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

FACTORS AFFECTING ACCESS TO FINANCE FOR SMALL BUSINESS

ENTERPRISES: IN THE CASE OF WOLAITA SODO TOWN

SENIOR ESSAY PROPOSAL SUBMITTED TO DEPARTMENT OF

ACCOUNTING AND FINANCE IN PARTIAL FULFILLMENT OF THE
REQUIREMENT FOR THE BACHELOR OF ART (BA) DEGREE IN
ACCOUNTING AND FINANCE

BY: BIRKNESH BIRHANU

ID NO: ACC/WE/112/12

ADVISOR: MULATU A. (MSc)

APRIL, 2024

WOLAITIA SODO, ETHIOPIA

 TABLE OF CONTENTS
Contents

Pages
TABLE OF CONTENTS............................................................................................................i
LIST OF ACRONYMS............................................................................................................iii
ABSTRACT..............................................................................................................................iv
CHAPTER ONE........................................................................................................................1
1. INTRODUCTION.................................................................................................................1
1.1. Background of the Study.................................................................................................1
1.2. Statement of the Problem.................................................................................................3
1.3. Research questions...........................................................................................................4
1.4. Objective of the study......................................................................................................4
1.4.1 General Objective.......................................................................................................4
1.4.2. Specific Objective....................................................................................................4
1.5. Significance of the study..................................................................................................4
1.6. Scope and Limitation of The Study.................................................................................5
1.7. Organizations of the study...............................................................................................5
CHAPTER TWO.......................................................................................................................6
2. LITERATURE REVIEW.....................................................................................................6
2.1. Theoretical Literature Review.........................................................................................6
2.1.1. Definition and concept of SME’s............................................................................6
2.2. Access to finance by small and medium enterprises.......................................................7
2.3. Potential source for finance for SMEs.............................................................................8
2.3.1. Friends and family...................................................................................................8
2.3.2. Bank loan..................................................................................................................8
2.3.3. Crowd Funding.........................................................................................................8
2.3.4. Angel Investors........................................................................................................9
2.3.5. Business grants.........................................................................................................9
2.3.6. Venture capitalist.....................................................................................................9
2.3.7. Factoring invoice advance.......................................................................................9
2.3.8. Product presales.......................................................................................................9
2.3.9 Government programs that offer start-up capital..................................................10

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 2.4. Informal Financial Source.............................................................................................10
2.5. Underlining Assumption and theories on Access to Finance for SMEs........................10
2.5.1. Irrelevance theorem of capital structure...............................................................10
2.5.2. Pecking order theory..............................................................................................11
2.5.3. Trade off theory......................................................................................................11
2.6. Benefits of SMEs...........................................................................................................12
2.8. The challenges of sources and access to finance...........................................................12
2.9. Review of Empirical studies..........................................................................................13
2.10. Summary and Research gaps.......................................................................................14
CHAPTER THREE.................................................................................................................15
3. RESEARCH METHODOLOGY.......................................................................................15
3.1. Research Design............................................................................................................15
3.2. Sources of data and data collection instruments............................................................15
3.3. Sample size....................................................................................................................15
3.4. Sampling method...........................................................................................................16
3.5. Data presentation and analysis.......................................................................................17
3.6. Time and cost budget.....................................................................................................18
3.6.1. Time budget.............................................................................................................18
3.6.2. Cost budget..............................................................................................................19
REFERENCES.........................................................................................................................20

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LIST OF ACRONYMS

DFID:--------------Department for International Development

EU:----------------European Union

GDP:--------------Gross Domestic Product

MFIs:-------------Microfinance Institutions

MSEs:-------------Micro and Small-sized Enterprises

MSMEs:-----------Micro, Small and Medium-sized Enterprises

OECD:--------------Organization for Economic Cooperation and Development

SMEs:---------------Small and Medium-sized Enterprises

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 ABSTRACT
Small business Enterprises play a major part in most economies. Although Small business
Enterprises play an imperative part within the financial development of a nation lack of
access to finance remain major challenges of their growth and operations. The purpose of
this study is to investigate factors influencing access to finance for Small business Enterprises
in case of Wolaita Sodo town. Moreover, the result show that majority of firms that have access
to finance are obtained the fund from banks. The size of the firm, collateral requirement,
awareness and cost of borrowing have a statistically significant effect on the access and
availability of finance for Small business Enterprises in case of A in case of Wolaita Sodo
town. Finally, Government has to establish an agreement either loan or finance with
banks and microfinance institution by providing funds/finance which only serve to finance
Small business Enterprises by creating a control mechanism through national bank to avoided
miss use of finance.

Key words: Access to Finance; finance; Sources of Finance; Small business, Enterprises

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 CHAPTER ONE

1. INTRODUCTION

1.1. Background of the Study

Small and Medium Enterprises (SMEs) play a major part in most economies. SMEs account
for the lion's share of businesses around the world and are vital donors to work creation and
worldwide financial development. SMEs play important part within the financial
development of a nation. Their part in terms of generating employment opportunity, business
era, commitment to trades & encouraging impartial dissemination of pay is exceptionally
basic. The SMEs broadly comprises of SMEs frame a expansive portion of private segment in
numerous created and creating nations. Small and Medium sized enterprises (SMEs) have as
a rule been seen as the energetic force for maintained financial development and work
creation in creating nations. They play multifaceted part such as boosting competition,
development, as well as advancement of human capital and creation of a budgetary system.
SMEs are portrayed as the normal home of business enterprise. The Micro and Small
Enterprises (MSEs) are depicted as the natural home of enterprise. Most large businesses in
Ethiopia have begun as SMEs and have developed to their development over long period by
cumulating.

Access to finance is exceptionally crucial for SME‘s development and development similar to
motor for vehicles. Czemiel (2013) show access to finance is vital for the proficient
allocation of capital and the enterprise‘s advancement. In any case, on the off chance that
they couldn‘t find the financing they require developments and brilliant thoughts may drop
down and this speaks to a loss in potential growth for the economy (Belanova, 2013). The
foremost imperative is SME‘s confront different challenges in looking for financial assets
from formal financial institutions. capital and business administration experiences.

The SME in Ethiopia is taken as an instrument in bringing approximately financial move by

successfully utilizing the ability and ability of the individuals especially ladies and youth
without requesting high-level preparing, much capital and advanced technology. The
financing of SMEs has been a theme of sharp intrigued in later a long time since of the key
part that SMEs play in financial improvement and their potentially important commitment to
financial expansion and work. Therefore, reducing this financing hole in low-income nations
like Ethiopia ought to raise the motivation to make SMEs and subsequently move forward

1
financial development and increment work creation. In expansion, improving SMEs ‘access
to finance.

The growth and advancement of SME‘s in a nation plays a incredible part and can contribute
to poverty reduction (Green, Kirkpatrick, and Murinde, 2006). One of the conceivable ways
put forward by Green et al. (2006) in diminishment of destitution is making strides the supply
of financial services to the destitute. Moreover, Beck and Demingue (2006) summarized later
observational investigate articles related to access to finance as a development imperative and
at last conclude that access to finance is a critical development limitation for SME‘s and
propose that legitimate institutions play an important part in unwinding this limitation.

SME‘s confront troubles when they are looking for to get the fundamental subsidizing assets
related with both entrepreneurial characteristics and firm characteristics (Czemiel, 2013). For
instance worldwide writing on the subject of access to finance appears that firms report
access to finance as a major impediment to improvement and development for SME‘s
following to swelling, charges and direction and political precariousness (Brehanu&Mesfin,
2015; Green et al., 2006.; Kofi, Paul, and Gaeten, 2013; Beck & Separate, 2014; Czemiel,
2013; Belanova, 2013; and Beck &Demingue, 2006).. Besides, Belanova (2013) appears that
indeed in case SME‘s are in a development stage refusal of bank advance application is down
to earth due to need of collateral.

Nearly all nations in Sub-Saharan Africa have experienced a tireless bounce in development
rate (especially in terms of GDP development per capital (Fjose, Grunfeld, & Green, 2010)).
For instance, Angola, Ethiopia and Mozambique show solid development (Fjose et al., 2010).
While, most SME‘s working and creating trade in Africa considers the foremost imperative
challenge as access to power and fund (Fjose et al. 2010). Surprisingly, enterprises in sub
Saharan African locale are less likely to have a credit (formal finance) than in other creating
region of the world (Beck & Separate, 2014).

In Ethiopia, SMEs are characterized based on the capital utilized and the number of workers
under the enterprise. The title given to these enterprises already will be Micro and Small
Enterprises which is managed by Micro and Small Enterprises Development Bureau. At this

moment, the later proclamation of Minister of Board (control # 373/2016) sub isolates the
previous institution in to two as; Urban Job Creation and Food Security Office and Small and
Medium Manufacturing Industry Office. The aim of this study is to assess access to finance

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for small business enterprise in case of woalita sodo town.

1.2. Statement of the Problem

In Ethiopia, the SME division to the national economy with respects to work creation and the
mitigation of contemptible destitution, numerous of the SMEs are incapable to realize their
full potential due to the presence of distinctive components that repress their development
and execution. Access to finance could be a key constraint to SME development, it is the
foremost cited obstacle confronting SMEs to develop their businesses in rising markets and
developing countries. SMEs in developing nations confront a financing gap that undermines
financial prosperity SMEs are a principal part of the financial texture in developing nations,
and they play a significant part in furthering development, advancement and success.

Unfortunately, they are emphatically restricted in getting to the capital that they require to
develop and grow, with about half of SMEs in developing nations rating access to finance as
a major limitation. They might not be able to get to finance from local banks at all, or
confront strongly troublesome loaning conditions, indeed more so taking after the later
budgetary crisis. Banks in developing nations are troubled by the need of moneylender data
and regulatory back to engage in SME loaning. The overall result is nonattendance of a well-
functioning SME loaning showcase, and SMEs are hindered in their development, with
negative results for advancement, financial development and macro-economic strength in
creating nations. Small and medium enterprises inherently represent more risk than large
corporations making financial institutions hesitant to lend to the small business owners don‘t
understand the process of applying for a small business loan and think that they can just walk
into a bank, fill out an application, and get approved on the spot it‘s important for small
business owners to come prepared with a business plan, financial statements or projections,
bank statements, tax returns, credit reports (business and personal), and copies of any relevant
legal documents (such as articles of incorporation, leases, contracts, operating licenses or
permits).

Financial institution will often require a small business to put up property as collateral for the
loan. This requirement can put pressure on a small business owner without valuable business

collateral to use personal property. Financial institutions prefer to spend money where it can
see the most profit, which is on the larger, corporate loan.
This study is different from earlier other studies in the following respect. Earlier studies
focused on specific functional areas not on the general constraints. The capacity of SME to

3
develop depends highly on their potential to contribute in rebuilding, advancement and
capability. All of these enterprises require capital and thus access to finance. Access to
finance could be a highly relevant limitation that imperils the financial development of the
countries. Thus this research serious to consider limitations to the financing of SME and
factors affecting access to finance both from demand and supply side in
. But the earlier studies mainly focused on the demand side factors.

1.3. Research questions

What are evaluate the influence of factors that impedes access to finance?
What are the mechanism that SMEs used in accessing finance?
What are the possible sources of finance in daily operation of SMEs?
What are the availability of common type of financing used by SME and how it is
preferred over the others?

1.4. Objective of the study

1.4.1 General Objective

The general objective of this study is to assess factors affecting access to finance for Small
buisness enterprise in case of Wolaita sodo town.

1.4.2. Specific Objective

The specific objectives of the study are:

To evaluate the influence of factors that impedes access to finance.

To analyses the mechanism that SMEs used in accessing finance.
To assess the possible sources of finance in daily operation of SMEs
To analyze the availability of common type of financing used by SME and how it is
preferred over the others.

1.5. Significance of the study

Access to finance is critical for the development of Small business Enterprises. In this way,
the reason of the consider is to set up the variables that impact access to finance by Small
business Enterprises.This is since finance may be a noteworthy component for deciding the
development and survival of Small business Enterprises. Access to finance permits little
businesses to attempt beneficial investments and contribute to the improvement of the national

4
economy and mitigation of destitution in Ethiopia.

Small and medium business enterprises play a major role in spurring economic development.
Governments have begun to ask what they can do to encourage the growth of Small
business Enterprises, thus enabling them to contribute to the national economy. There is
quite a large gap, however, between the intentions of governments and their understanding of
the needs and challenges Small business Enterprises face.

The study is significant since it would enable the government to come up with appropriate
regulation, funding programs, and schemes toward improvement of access to finance by
SMEs. The study will also provide literature review for scholars who will wish to study
related subject matter in future.

1.6. Scope and Limitation of The Study

The study is restricted to the small and medium enterprises with respect on accessing factors
affecting access to fund and its availability working in Wolaita Sodo town subcity, the
financing gap of SMEs and prescribe ways of tending to the financing gap. This geographical
limitation is because of time, access and cost restriction. Hence the finding cannot be

generalized a city or national level. It is only limited to Wolaita Sodo town. Respondent‘s bias
and subjectivity can also be considered as a limitation. Moreover, unwillingness of participants
to participate in the study of some respondents to respond to the questionnaire appropriately
might affect the validity of the study findings. Thus, further and more comprehensive study
will be required to understand fully on this area of research.

1.7. Organizations of the study

The research paper will be organized into five chapters: Chapter one deals with the
introduction part consisting of background of the study, statement of the problem, research
objectives, significance of the study, and scope and limitation of the study. The second
chapter discussed about the review of related literatures about the subject matter; chapter
three focuses on research methodologies; chapter four contained data analysis interpretation
and discussions of the result. Finally chapters five provided for conclusions and
recommendations.

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 CHAPTER TWO

2. LITERATURE REVIEW

2.1. Theoretical Literature Review

This chapter illustrate of existing writing based on realities and hypotheses with theories
which are defined to clarify, anticipate and, in numerous cases, to challenge and amplify
existing information inside the limits of basic bounding assumptions

SMEs in creating and rising markets are doubly affected; as lenders tend to withdraw from
higher-risk markets at the same time as credit shifts advance from SMEs and towards bigger
corporate clients. When banks are greatly risk-averse, small- and medium-sized ventures
(SMEs) are likely to be more influenced than bigger ones. With banks permitting a lower sum
for advances, SMEs, regularly among the final in a pecking order, would have indeed more
issues competing for less stores at higher costs. Hence, the theoretical issues related with
obstructions to formal finance will be tended to and displayed in to two sub segments as from
the financial institution viewpoint and SMEs point of view.

2.1.1. Definition and concept of SME’s

A small and medium size enterprise (SME) is a business with incomes, resources, or numbers
of representatives that drop underneath a certain level. The criteria for deciding an SME
changes between nations and now and then between businesses. There isn't a set definition of
SME that applies all inclusive. Each nation gets to set its claim definition, and they may too
choose to set particular limits for particular businesses. For case, within the European Union
(EU), a business with less than 250 workers is considered an SME, whereas within the united
States, an SME may have up to 1,200 workers. In any case, there's a shared objective of
characterizing an SME in that it looks for to distinguish small businesses and medium-sized
businesses from large enterprises.

SMEs make up the tremendous lion's share of businesses in most nations. SMEs stay a
critical perspective of financial development, advancement, and differing qualities. SMEs can
come from any industry, but by their nature, a few businesses are more likely to be SMEs
than others. For occurrence, lawful workplaces, trucking companies, individual care
administrations, dental specialist workplaces, eateries, and bars frequently work with
moderately few representatives.

6
The definition of small and medium enterprise (SME‘s) around the world is distinctive which
cruel there is no quick and sharp run the show to characterize Small and Medium-sized
Endeavors around the world. Accordingly distinctive nations and institution characterize
employing a number of measures to recognize and describe SME‘s whereas there's no
agreement on any one degree. The foremost visit measurements used to characterize SMEs
are the number of workers of the venture, the esteem of settled resource of the enterprise and
enterprises yearly turnover in terms of incomes

2.2. Access to finance by small and medium enterprises

The arrangement of credit has progressively been respected as a critical device for raising the
incomes of provincial populaces, primarily by mobilizing assets to more profitable
employments.

As advancement takes put, one address that emerges is the degree to which credit can be
offered to the country destitute offices their taking advantage of the creating entrepreneurial
activities. The era of self business in non- cultivate exercises requires investment in
working capital. Be that as it may, at low levels of salary, the collection of such capital may
be troublesome.

In Ethiopia, despite the enormous importance of the SME sector to the national economy
with regards to job creation and the alleviation of abject poverty, many of the SMEs are
unable to realize their full potential due to the existence of different factors that inhibit their
growth and performance. One of the leading factors contributing to the unimpressive growth
and performance of the enterprises is limited access to finance (Wolday and Gebrehiwot,
2004). In a similar way, comparing small and large firms the World Bank finds that small
firms face more challenges in obtaining formal financing than large firms; they are much
more likely to be rejected for loans, and are less likely to have external financing(world
bank,2015).In Ethiopia, despite the introduction of banking sector reform in 1994 that led to
expansion of the banking industry, SMEs‘ problem of credit access has persisted implying
that changes in the banking sector structure per se are not sufficient to introduce competition
in the banking industry and an improvement in SME credit access (Ashenafi, 2012). Access
to monetary administrations by small business is ordinarily seen as one of the limitations
limiting their benefits from credit offices, in most cases the access issue, particularly among
formal financial institutions , is one made by the institutions primarily through their lending
approaches. This is often shown within the frame of the prescribed minimum advance sums,

7
complicated application method and limitations on credit for particular purposes advance
contend that the sort of money related institution and arrangement will frequently decide the
finance issue. Where credit indeed length, terms of installment, required security and the
arrangement of supplementary administrations don't fit wants of the target bunch, potential
borrowers will not apply for credit indeed where it exists and when, they will be denied
access.

Access to finance can be broadly characterized as access to financial items (e.g. stores and
loans) and administrations (e.g. protections and value items) at a sensible cost. Given the
widely recognized interface between access to finance, development, wage smoothing and
poverty reduction, numerous nations have received the objective of all inclusive budgetary
access. (SushmaNarain, 2009).

2.3. Potential source for finance for SMEs

It depends a lot on how much money we need, how good our idea is but also what we‘re
willing to part with in exchange for financing. Generally through these the best options are
here;

2.3.1. Friends and family

We could start by asking our friends and family if they‘re willing to invest in our business or
give us a loan usually they won‘t ask for interest back (like banks for examples) and they are
also more related about getting paid back if they actually have the money, however there is of
course a downside. Mostly that it can bring some problems in our relationship with them as
money generally has that power. worth a shot through in some case especially if we don‘t
need a big loan/ investment.

2.3.2. Bank loan

If we have got a good idea for a business and good and credit we could probably get a bank
loan this is a good option because we don‘t have to give away equity in our business, but at
the same time we need to pay back the loan.

2.3.3. Crowd Funding

This is another popular option what‘s great is that you can raise a lot of many but of course it
also has its own downside. With reward based crowd funding we will like have a lot of
different investors ( even hundreds that we will need to reward when the time comes. With

8
equity based crowd funding we will need to give away equity in our business, so we won‘t be
the sole decision- maker. In Ethiopia local Tech firms launches Ethiopia‘s first crowd funding
platforms.

2.3.4. Angel Investors

Angel investors are a great option if we need a very big investment usually hundreds or
thousands or even millions. This money doesn‘t have to be paid back not like we would pay
back a loan however, we will have to give away equity the investor will expect result and
their money back with a big profit. In Ethiopia a group of investors has created the Addis
Ababa angels network the first in Ethiopia.

2.3.5. Business grants

Government makes provision for funding small business that aid in the progress and
developments of the economy. Check and see if our business qualifies for a government
grants.

2.3.6. Venture capitalist

have both high growth and high risk potential. A venture capital investment may be
appropriate for small business that are beyond the start-up phase and already generating
revenues. However venture capitalists have a short leash when it comes to company loyalty
and often look to recover to five year time window

2.3.7. Factoring invoice advance

Through this process, a service provider will front you the money on invoice yhat have been
billed out, which you then pay back once the customer has settelled the bill. This way the
business can grow by providing the funds necessary to keep it going while waiting for
customers to pay for outstanding invoices.

2.3.8. Product presales

Product presale is the method of selling products before the business launches for the purpose
of financial purpose of your business, while it is not good idea to sale the products that are
not ready for the market, it can harm the future of the brand.

9
2.3.9 Government programs that offer start-up capital
Government launches many programs all to support start-up small companies. The major
reason behind this step is small and medium enterprises contribute to more than 50% of the
country‘s GDP.

2.4. Informal Financial Source

Sources of informal finance are those that do not fall in the organized sector and are not a
registered institution. The one can be friends, families members, local lenders as well.
However, it is highly recommended not to use as source of informal credit for a loan. Since
there is no way to regulate these sources, we might be faced with higher interest rates and
harsh loan terms.

Advantages are;

• No external control over the landing practices.

• Suitable for poor households.
Disadvantages

• The interest rates can be very high

• The lenders can use unfair means to get the money back.

2.5. Underlining Assumption and theories on Access to Finance for SMEs

Theories are defined to clarify, foresee and, in numerous cases, to challenge and amplify
existing information inside the limits of basic bounding assumptions. The hypothetical
system is the structure that can hold or back a hypothesis of a research ponder. Here are a few
of the presumptions which can hold or back a hypothesis of a research which is accumulated
from a book of Access to Fund and Improvement: Hypothesis and Measurement.

2.5.1. Irrelevance theorem of capital structure

There are a number of hypotheses that enterprise to reply the following question. How do
owners and supervisors of enterprises make financing choices? Modigliani and Mill operator
in 1958 proposed insignificance hypothesis of capital structure in an attempt to reply the over
question. The hypothesis is of the view that ventures back their businesses utilizing inside
funds, obligation and value. Agreeing to Goya & Straight to the point (2005), when it gets to
be vital to use obligation and value, the hypothesis proposes that debt-equity proportion is
decided in a way that it isolates cash streams among the distinctive financial specialists. This

10
theory is important since it recognizes that trade owners to begin with considers inner sources
to external sources to back their operations. This characteristic is additionally common to
proprietors of trade in Ethiopia especial within the private business .(Goya & Straight to the
point (2005).

2.5.2. Pecking order theory

Pecking order theory is utilized to assist clarify how companies choose where to source their
financing, and in this way it makes a difference clarify what drives ideal capital structure, or
the perfect adjust of obligation and value financing. Pecking arrange theory is the thought
that company supervisors choose how to fund company operations based on a progression
where they to begin with utilize held profit (inside financing), at that point debt financing, at
that point equity financing.

Inside financing is the primary choice in pecking order theory since there's no additional cost
related with utilizing it. On the off chance that a company uses as it were held profit for
financing, there's no cost of debt or cost of equity to be accounted for. Debt financing comes
in moment since of the intrigued payments associated with utilizing obligation capital.
Whether the company chooses to require out commerce advances or issue corporate bonds,
they will have to be pay a few intrigued, making the cost of debt more than the non-existent
cost of utilizing held profit

2.5.3. Trade off theory

The trade-off theory of capital structure is the thought that a company chooses how much
debt finance and how much equity finance to utilize by adjusting the costs and benefits. The
classical form of the speculation goes back to Kraus and Litzenberger who considered an
adjust between the dead-weight costs of insolvency and the assess sparing benefits of debt.
Frequently organization costs are too included within the adjust. This hypothesis is regularly
set up as a competitor hypothesis to the pecking order theory of capital structure. A survey of
the trade-off hypothesis and its supporting prove is given by Ai, Straight to the point, and
Sanati.

A critical reason of the hypothesis is to clarify the truth that enterprises as a rule are financed
incompletely with debt and somewhat with value. It states that there's an advantage to
financing with obligation, the charge benefits of debt and there's a taken a cost of financing
with debt, the costs of money related trouble counting insolvency costs of debt and non-

11
bankruptcy costs (e.g. staff clearing out, providers requesting disadvantageous instalment
terms, bondholder/stockholder infighting, etc.). The negligible good thing about advance
increments in obligation decays as debt increments, whereas the negligible cost increments,
so that a firm that's optimizing its by and large esteem will centre on this trade-off when
choosing how much debt and equity to utilize for financing.

2.6. Benefits of SMEs

The role of SMEs is quite substantial in many countries especially in emerging and
developing countries. SMEs account for a large share of total employment job creation and
GDP in emerging economies. Now that is really important, especially if we take in to account
that 600 million jobs will be needed in the next 15 years to absorb a growing global work
force, mainly in Asia and sub-Saharan Africa. New jobs boost living standards and foster
social cohesion in a country. And therefore SMEs are one of the main factors of economic
growth and social peace. Without a robust and healthy SME sector, this cannot be achieved.
Let‘s take the example of South Korea, while that country is associated with giants like
Samsung, Hyundi, LG. SMEs in Korea account for more than 80% of total employment and
about 50% percent of total value added. SMEs also played a large role in the transformation
of Korea in to a high income industrialized country during the last quarter of the 20th century.
Not surprisingly, SMEs are always high on the agenda of the government there. Of course we
should not conclude that all SMEs are drivers of growth and job creators. SMEs can differ
greatly in their role in the economy. A lot depends on the skills of individual entrepreneurs,
their attitude and willingness and ability to grow their business. But on the whole, SMEs play
an important role in many economies, and on average they contribute more to employment in
low income countries than in high income countries. Now that we have established that
SMEs play an important role in many economies.

2.8. The challenges of sources and access to finance

The challenges of sources and access to finance of SMEs in Ethiopia, like in most developing
nations are gone up against with the same challenging of getting to financing in their offered
to grow. Standard financial institutions are not willing to supply credits to the segment or
maybe huge sum of cash is given to large scale firms. Eshetu and Mammo (2009, 15) states
that, ―commercial banks are hesitant to lend little sum of cash to little trade since the cost of
regulating the advance exceed the advantage collected to them.‖ This appears that banks are
not slanted to create an innovative and efficient approach that minimizes hazard and

12
regulatory cost to serve the sector. As a result the conventional approach utilized by banks
and financial institution does not enable them overcome the chance and exchange cost of
loaning to SMEs (ECA 2001, 12).

The monetary policy of the government does not compel banks to expand their loans to
SMEs. Mulu (2007) and Etsegenet (2000) appears that approximately 76% of SMEs get their
start-up and development capital from informal financial sources such as, own saving, cash
lenders, relatives and companions. large portion of capital is come from own saving and
friends and relatives are the second biggest money related sources for SMEs.
As a result debt financing has ended up an awfully sticky point within the development and
capital mobilization efforts of SMEs over the board. In an ideal world, financial institutions
coqunting banks ought to engage no fears in expanding financing alternatives to SMEs, but
under conditions such as those that win in Ethiopia, one that's informed by an interconnection
legion of problems it'll be suitable to comprehensively get it them appropriately as the
primary step towards settling them. For occasion, residential monetary institutions are
haunted by exceptionally high hazard recognition; the absence of intermediary ability
components also talks of a related complication, and after that comes the address of the scope
of the capacity of SMEs to be practical and competitive.

2.9. Review of Empirical studies

A few related studies are conducted by distinctive researchers completely different nations.
The point of this study was centred on analyses components affecting get to finance and its
accessibility for Small and Medium enterprise. A later World Bank study on SMEs, which in
Ethiopia are evaluated to have come to 800,000 up until 2016, found that financing was a key
imperative to work creation and development.

Concurring to Wanjohi & Mugure, (2008), Need of get to to credit offices is nearly
universally shown as key issue for small and small scale enterprises. In most cases, indeed
where credit is accessible basically through banks, the business visionaries may need
flexibility of choice since the banks‘ loaning conditions may drive the buy of overwhelming,
steadfast equipment that can serve as collateral for the bank. Credit limitations work in
assortment of ways where undeveloped capital advertise powers business people to depend
on self- financing or borrowing from companions and relatives. Need of acsess to long-term
credit for micro, small and medium enterprises strengths them to depend cost brief term
finance

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2.10. Summary and Research gaps
A research gap is defined as a topic or area for which missing or insufficient information
limits the ability to reach a conclusion for a question. A research need is defined as a gap that
limits the ability of decision-makers (policy-makers, patients, practitioners) from making
decisions. The researcher found on studies conducted in Ethiopia uses different related
factors as a measure. None of these studies conducted in Ethiopia checked this four factor;
Firm characteristics, Cost of borrowing, Collateral requirements and Awareness of Funding
Opportunity (Availability of Finance) with the access to finance and its availability; plus
some of these empirical studies also recommended future studies to be made on this area of
the study.

Because it can be understand from the survey the Loaning institutions or financial source
providers don't pay consideration to form budgetary sources accessible for the SMEs.
Encourage there may be a need of credit facilities organizations that are well suited for the all
significant SMEs‘ sectors. As can be get it from the literary works there's still a issue that
required to be tended to in getting to back for SMEs in Ethiopia.

With an objective of giving data on the above, this consider made an endeavor to distinguish
components that impacting access to finance for Small business enterprise in Wolaita Sodo
town. To conclude, from the information gap talk it is caught on that more consider ought to
be done to have more comprehensive understanding on this subject. In this manner, in this
inquire about, objectively chosen discernment variables to discover out their genuine impact
on accesses to finance and its accessibility.

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 CHAPTER THREE

3. RESEARCH METHODOLOGY

3.1. Research Design

Research design is the blueprint for fulfilling research objectives and answering research
questions. In other words, it is a master plan specifying the methods and procedures for
collecting and analyzing the needed information. The types of research employed under this
study will be mainly descriptive type research. The major purpose of descriptive research is
description of the state of affairs as it exists at present. Then this study describes and critically
assesses the factors affecting access to finance for small business enterprises: in the case of
Wolaita Sodo town

3.2. Sources of data and data collection instruments

The study will be employed both primary and secondary sources of data.

i. primary sources

In order to realize the objectives of the study, the researcher uses well designed questioner as
best instrument. The interview method will be employed to gather information specifically
from managers/owners of the enterprise.

ii. Secondary sources

Secondary data from files/related documents/, office manuals, and annual reports will be
used.

3.3. Sample size

Currently, the total numbers of small business enterprises operated in Wolaita Sodo town are
around 453 (Wolaita Sodo town enterprise document 2016). These enterprises are unevenly
distributed in 9 kebeles. From this, the researcher statistically selects 60 enterprises as a
sample from a total of 101 and 69 enterprises of Fana and Wadu kebele respectively.

n = N/1 + (N*E))2 where …. n= sample size

n= 170/1+ ((170*(.1)) 2 N= total population and
=60 E= acceptable range of error

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 Source- Yamane (1967: 886)

This is because it is claimed by the government of Ethiopia, that the small business
enterprises sector is a prime strategy to economic development in urban areas and also the
number of enterprises in these kebeles are many in terms of quantity. Second, the two kebeles
will be selected based on their nearness and convenience to collect data in short time.

Although there are different sectors in which the small business enterprises operators have
been engaged in kebele Fana and Wadu, the sectors selected for this research are
construction, manufacturing and service sector because the largest concentration of small
business enterprises operators are engaged in these sectors.

3.4. Sampling method

In order to gather reliable information that is relevant to the study, the researcher used both
probability and non probability sampling techniques. Particularly judgmental non probability
sampling method will be used to determine the number of kebeles that should be included as
a sample. Based on this, the researcher selects kebele Fana and Wadu as a target respondent
group for the study. This method will be selected because it is less costly and convenient to
use. More over; if the researcher is well experienced, this technique is used to gather reliable
data as probability purposely selected kebeles.

In addition to this, the researcher used stratified probability sampling method in order to
select specific respondents from each purposely selected kebeles. Accordingly; the researcher
selects a sample of 24 i.e. ((69/170)*60)) and 36 i.e. ((101/170)*60)) enterprises from 03 and
02 kebele respectively. This method will be selected because the number and nature of
business that MSEs engage doesn’t constitute a homogeneous group.

More over; because the nature of business that small business enterprises operate in the two
sub kebeles are heterogeneous, the researcher selected 12 i.e. ((35/101)*36)), 14 i.e.
((39/101)*36)) and10 i.e. ((27/101)*36)) respondents from manufacturing, construction and
service enterprises of 02 kebele respectively.

The researcher also tries to select 11 i.e. ((33/69)*24)), 9 i.e.((25/69)*24)) and 4 i.e.((11/69))
enterprises from manufacturing, construction and service enterprises of 03 kebele
respectively.

 N.B. there is no variability in the character of each unit in the strata.

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3.5. Data presentation and analysis
After relevant information is gathered, the data are coded, classified, and presented in tabular,
pie chart and graphical form with appropriate percentage computed values. The analysis part
will be conducted by descriptive method of data analysis, which is used to compare and
contrast different variables (factors). Finally, appropriate conclusion and recommendation
can be forwarded based on the findings of the study.

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 3.6. Time and cost budget

3.6.1. Time budget

The time budget considered all the activity that is to be performed to active the objective
timely.
No List of the activity Month
Feb Mar Apr May Jun
1 Title selection x
2 Preparation and submission of proposal x
3 Literature review x
4 Data collection x
5 Data analysis x
6 Report writing x
7 Report submission x
8 Presentation x x

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3.6.2. Cost budget
Cost budget refer to budget required to conduct the study which comprise the materials and
resource required.
No National requirement Unit cost (in birr) Number of required Total cost
1 Pen 20 2 40
2 Flash memory 8GB 250 1 250
4 Paper 2 23 46
5 Telephone expense 25 4 100
6 Binding 30 1 30
7 Transportation rent 30 4 120
8 Typing and printing 15 23 345
9 Miscellanies 200
Total 1131

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