The Prime Risks of Financing Small and Medium Enterprise (SMEs) Business-Projects in Developing Economies

Abstract

The importance of project finance in economic development cannot be underestimated. Currently, most developing economies are collaborating with private individual investors and organizations, as well as financial and none financial institutions to attain the desire level of development through business-projects implementation. However, typical of most business-project implemented in developing economies is the numerous risks associated with its financing activities. The term risk can be viewed as the chance of failure in achieving objectives or goals. Most importantly, risk is part of investing but it can be measured and managed within an investment portfolio and taking on some risk is necessary for higher returns. Also, taking on greater short-term risks may be necessary to receive the long-term returns needed to achieve a lifestyle goals and objectives. However, taking on too much risk may prove to be a mistake. It is important to note that every business-project requires a substantial amount of capital outlay from individuals, sponsors, organizations financial and none financial institutions and or government. This therefore call for a holistic study to be conducted to identify the prime risks of financing business-projects. This will help to provide thoughtful information on those risks to investors, sponsor, fund providers (individuals / financial institutions) and entrepreneurs with special interest in business-project financing. This study focused on the identification of the prime risks investors face in financing SMEs business-projects in developing economies. In this regard, the prime risks of financing SMEs business-project is the independent variable and business-project activities is the dependent variable. To measure the prime risk of financing SMEs projects in developing economies, this study dwelt on behavioral economics theory to identify what the study term as Idea Risk. The study also reviewed finance and financial management theories to identify what the study term as Competency Risks and Return on Investment Risks. Through this study, Business Idea Risk, Competency Risk and Return on Investment Risk have been identified as the prime risks of financing business-projects. This study has also developed a graphical model to present these prime risks, prove the inter-connectivity among the risks and as well demonstrate how they can collectively have negative impacts on business-projects.