Debt financing is a common phenomenon for all business enterprises despite their size, location or type of business. In addition, due to the fact that debt financing is preferable to equity financing, small businesses adapt it so that they can still have full ownership of their enterprises. However, smaller businesses have trouble acquiring finances from institutions like banks as compared to large businesses. This, therefore, calls for the intervention of the state and local government to help small businesses get finances.
There are a number of ways through which the government and local state could offer financial aid to small businesses. The most common way is by the government giving grants to the entrepreneurs of the small businesses. The grants are non-refundable, and it is, therefore, a source of capital to the enterprise. The reasons for the government giving grants are to regulate the prices in the market or to boost the local small industries. The government could also offer guarantee programs whereby small businesses are guaranteed by the state or local government to acquire loans from other money lending institutions. Tax-exempt bonds are other sources of finance for small businesses.
They are essentially debt securities given by the government, and once sold in the market to investors, the interest earned is tax-free, hence becoming a good source of funds for small businesses. The debt-guarantee program that is available for a bookstore is the Small Business Association (SBA). This is an association made up by small business enterprises which are able to guarantee them when taking up loans from other money lending institutions. Most small companies are reluctant to apply for debt financing because the money lending institutions consider them to lack an understanding of the possible risks. Their capacity to pay back the borrowed funds is another hindrance as well as a lack of collateral.