Debt financing to new small ventures in South Africa: The impact of collateral, ethics and the legal system

Abstract

The purpose of the study on which this article is based was to ascertain to what extent collateral, ethics and the legal system impact on the availability of bank and trade credit to new SMEs in South Africa. Focusing on both commercial banks (using collateral) and trade creditors (unsecured), this study created a unique opportunity to assess the impact of collateral on the importance of ethical behavior and the efficiency of the legal system as prerequisites for the availability of external debt to new SMEs. The legal systems of countries are also not equally efficient, and could even differ in terms of secured and unsecured debt, which, in turn, could influence the ethical behavior of the entrepreneur. The complex relationship between collateral, ethics and the legal system and how it influences the availability of external debt are accentuated. The article also gives insight to entrepreneurs and government regarding potential reasons for the non-availability of credit from trade creditors and commercial banks to new SMEs.   Key words: Debt finance, SMEs, collateral, legal system, ethics.