Small Business Financing Problems in Bangladesh

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Small Business Financing Problems in Bangladesh


A small business is a business that is privately owned and operated, with a small number of employees and relatively low volume of sales. Small businesses are normally privately owned corporations, partnerships, or sole proprietorships. The legal definition of “small” varies by country and by industry, ranging from fewer than 15 employees under Fair Work Act 2009, 50 employees in the European Union, and fewer than 500 employees to qualify for many U.S. Small Business Administration programs. Small businesses can also be classified according to other methods such as sales, assets, or net profits.

Small businesses are common in many countries, depending on the economic system in operation. Typical examples include: convenience stores, other small shops (such as a bakery or delicatessen), hairdressers, tradesmen, lawyers, accountants, restaurants, guest houses, photographers, small-scale manufacturing etc.

The smallest businesses, often located in private homes, are called micro businesses (term used by international organizations such as the World Bank and the International Finance Corporation) or SoHos. The term “mom and pop business” is a common colloquial expression for a single-family operated business with few (or no) employees other than the owners. When judged by the number of employees, the American and the European definitions of a micro business are the same: under 10 employees. There is a notable trend to further segment different-sized micro businesses; for instance, the term Very Small Business is now being used to refer to businesses that are the smallest of the smallest, such as those operated completely by one person or by 1-3 employees


  • According to Small Business act 1934,” A business which is independently owned and operated and not dominant in its field” is a Small Business.
  • Bolton Report on the commission of the inquiry on Small Business firms, 1977,”Small firm is one that has a relatively small share profits market.”
  • Stoner, Freeman, & Gilbert, 1995, “Small Business refers to business locally owned and managed, often with very few employees working at a single location”.
  • US Government, “A Small Business is one with fewer than 500 employees.”

According to executive committee for national economic development,”A Small Business one of which process at least two of the following characteristics:

  • -Managers are the owners,
  • -Capital supplier and the owner is individual or a small group,
  • -Worker and the owners are local, market may not be so.
  • -Relatively smaller compared with the biggest unit of the industry [Sales, employees etc.]

From all of the above definitions we can make a general definition of Small Business. A business not dominating in its field, does not engage in any new marketing, workers are local, working at a single location, produced units are relatively small in size, and often all organized by the owner or his family members.

Now-a-days there are a lot of Small Business firms are operating in verity of fields. We get our daily necessaries from the grocery shops. One takes food from a restaurant or from a first food shop. Some shops are selling cloths, books, electronics etc. Hair cutting saloon, laundry, automobile and electronic mechanic, travel agent all of them are serving us in different ways. A doctor, engineer or a lawyer give us different consultation services.

Some other definitions:

Curtis E. Tate, Jr. and his co authors in their book “Successful Small Business Management” (1982) define small business as “An organization with a name, a place of operations, an owner, and one or more workers other than the owner.”

The Federal Reserve Bank of USA says small business is one which “is independently owned and operated but is not dominant in its field.” In the Small Business Act of 1953, the US Congress gave the same definition of small business.

Definitions in the Context of Bangladesh:

“Small industry means an industrial establishment or unit which is rum mainly by hired labor and not using mechanical motive power but does not normally employ more than 50 workmen and whose land, building and machinery does not exceed Tk.150, 00,000 in value in either case.” – E. Pakistan Small Industries Corporation Act of 1957.

Basic Small Business Principles

Most small businesses fail and they fail because their owners lose sight of some of the few basic principles on which any business, but especially a small business, must be founded. We operate in a free market economy and that means that, although you may think you know better and you may even be right, it’s the market which determines who survives and who prospers. If nobody buys your product, you’re dead, even if you’re right.

Many small business owners focus on their product. It makes sense – that’s what they know. It is also deadly. Their product is not going to make them a single cent. It is the customers that bring in the money and that are where the focus has to be. Attention to the product is only in terms of whether it satisfies the customers. All the business’s income comes from its customers.

Many small business owners don’t know who their potential customers are and have even less idea of who is an ideal customer. They waste time on the demanding customers and often lose money on them while ignoring the quiet, pay-on-time, high margin customers who are carrying the business. A small business, by definition, has a small client base – it can choose its customers. It needs to choose the valuable ones and it needs to be able to recognize them.

Many small businesses waste money on advertising and promotion. It’s not that they shouldn’t advertise but a small business has small resources. Advertising and promotion must be funneled to achieve high returns. If the ad is mostly seen by people who have no intention of buying your product, this is not efficient. Start by making sure your existing customers know what they can get from you. This is guaranteed high – return promotion. Then start targeting small groups similar to your existing customers. This approach is more work but it will get far better results than running a big ad in some general circulation medium.

Characteristics of Small Business Enterprises:

There are many characteristics of small business. Some of which are described in the following paragraph:

Unity of Individuals and the Organization

The strength of small business is that individual employees retain their personal identities, yet support the unity of the organization. Employees understand and commit themselves to corporate objectives.

High Individual Motivation

Individuals are highly motivated for further exertion and organizational development. Though pay for performance is a principal motivator in a small business, comfortable and social life related workplace plays a role of the social motivator.

Owners as Managers

In most of the small businesses, owners are responsible for managing the firm. The employees are hired on owner’s discretion. Owners are responsible for taking any and all management decisions.

Streamlined Communication

With simple and petit structure of the organization, good and effective communication are maintained with and among employees. This keeps the organization more susceptible to changes in the business arena.

Supportive climate for Organizational Integration

Management including supervisors keeps close relations with subordinates. They offer training, encouragement and counseling to subordinates for problem solving. Employees are provided with challenging and enjoyable workplace.

Sources of funding

Small businesses use several sources available for start-up capital

  • Self-financing by the owner through cash, equity loan on his or her home, and or other assets.
  • Loans from friends or relatives
  • Grants from private foundations
  • Personal Savings
  • Private stock issue
  • Forming partnerships
  • Angel Investors
  • Banks
  • SME finance, including Collateral based lending and Venture capital, given sufficiently sound business venture plans

Following are the Main sources of Finances for the Small Business Firms

Many Entrepreneurs often try to manage the initial capital from their past savings. But as the size and the magnitude of the business spreads, own source most likely to be inadequate, hence, the need for outside funds arises. Such suppliers may be individuals or groups of individuals, agencies or even banks and financial institutions.

Two things should be recognized when one is faced with the problem of obtaining outside capital assistance.

1. An established concern with a good record of operations usually has better access to available sources of capital than does a new firm.

2. Some personal capital available for investments in the firm by the new owner is almost always a requisite to obtaining any type of outside assistance.

An exhaustive list of the sources of outside capital available for the small business persons is provided in the following table:

Sources of Small Business Finances

Sources of Long-term Finance Sources of Short-term Finance
I.Borrowing from issue of corporate securities,

a. Ownership Securities

i. Equity Shares

ii. Preference Shares

b. Creditorship securities

i. Debentures

ii. Bonds

II. Institutional Borrowings:

i. Industrial Development Banks

ii. Small Business Finance Companies

iii. Commercial Banks

iv. Trust Companies

v. Insurance Companies

vi. Factoring Companies

vii. National Companies

viii. Commercial Finance Companies

ix. Venture capitalists

x. Leasing Finance Companies

xi. Investment Bankers

III. Borrowing from Funds & Associations

i. Mutual Funds

ii. Pension Funds

iii. Savings & Loan Associations

iv. Investment Clubs

v. Credit Unions

IV. Borrowing from Agencies & Companies

i. Equipment Suppliers

ii. Family investment Firms

iii. Financial consultancy firms

iv. Micro Finance NGOs

v. Industrial Foundations

vi. Tax Exempt Foundations

vii. Charitable Foundations

viii. Veteran Administration

ix. Industrial Development Corporations

V. Borrowing from Individuals

i. Inherited Funds

ii. friends and relatives

iii. Customers

iv. Employees

vi. Companies

vii. Neighbors and Acquaintances

viii. Partners

ix. Public Deposits

VI. Inter Corporate Deposits

i. Call Deposits

ii. Three month Deposits

iii. Six month Deposits

A very short indicative introduction of some the aforesaid sources may be seen as under:

A. Sources of Short term Financing

Working capital consists of two components viz,

i. Fixed Component

ii. Variable Component

While the fixed or permanent component is to be financed through long and medium term sources of finance, the variable portion of working capital is financed through short term sources, that is, sources that require repayment in a year or less. Some of the important sources are trade credit, bank credit, public deposits, customer’s advances, factoring, etc. Certain internal sources like depreciation, reserves and provisioned, are also used for short term financing purposes.

Bank Credit:

Bank credit is the major source of finance for working capital. Banks offer both secured as well as unsecured loans to business firms such as cash credit. Overdrafts, loans and advances and purchases and discounting of bills. They provide credit against security. A loan may be secured by tangible assets or by personal security either by lien, pledge, hypothecation, mortgage or charge etc. Bank loans are an important source of business financing such as seasonal build ups in accounts receivable and inventories. Banks do not provide 100% finance. They insist that the customers should bring a portion of finance from other sources.

Public Deposits

Another source of short term finance are unsecured public deposits. In some countries a company can borrow only up to 25% of its share capital and free reserves. The maturity period varies from 6 months to 5 years. Maximum interest rate payable is 15%. A minimum maturity period of only 3 months is permitted for deposits amounting to 10 % of share capital and free reserves. The rules relating to public deposits have been made very strict in order to protect the interest of investors.

Accounts Payable

They are created when the firm purchases raw materials, supplier’s goods for resale on credit terms on open account. They are interest free and securities free. However, accounts payable is a legally binding obligation of a firm. They also include bills payable.


They are a short term liability that arises when securities are received but payment has not yet been made. Examples are wages and salaries payable, taxes payable, expenses payable, etc.

Unsecured Non-Bank Short Term Sources

The following non-bank short term sources are used though they are not available to every business.

Private Loans

A short term unsecured loan may be obtained from a wealthy shareholder, a major supplier, or other party interested in assisting the firm through a short term difficulty.

Cash Advances from Customers

A customer may pay for all or a portion of future purchases before receiving the goods. This form of unsecured financing provides funds to purchase raw material and product the final products.

Commercial Paper

These consist of promissory notes with maturities of various periods ranging from 3 days to even a year is usually issued in higher denomination and can be used only by large well known companies which enjoy a fairly high credit rating. It is purchased by other firms wanting to invest in marketable securities temporarily. Individuals, insurance companies and other institutions also purchase commercial paper.

Pledging and Factoring Receivables

These are two techniques of secured short-term financing employed with accounts receivable as the collateral

By pledging or assigning accounts receivable a firm give up the right to the cash collected on those accounts. Because receivables are normally most liquid, they are attractive as collateral to commercial banks and finance companies.

Factoring receivables is the outright sale of the account receivable to a factor that generally accepts all the credit risks associate with the collection of accounts. A factor is a financial institution that purchase accounts receivable from business firms. Since the accounts are sold, a factoring does not involve a loan.

B. Sources of Long-Term Finance

Equity Shares.

The equity shares are the main sources of finance and it is contributed by the owners of the companies.

Retained Earnings

Reserves and surplus build over the past are called retained earnings. These earnings can be interested in business for modernization and expansion.

Deferred Credits

Many times the suppliers of machinery provide deferred credit facility under which payment for the machinery may be made over a period of time.

Preference Shares

Preference shares confer on preference shareholders two rights viz., to receive the preference dividend and get back their capital on priority basis. Investors, who like to earn a limited but steady return on their capital, prefer preferences share investment.

Institutional Term Loans

Term loans are presently the most important source of finance. Loans obtained from banks and financial institutions are generally secured loans. They carry a fixed rate of interest and are repayable in installments.


Debentures are very commonly used creditorship securities. Different types of debentures are issued to mobilize the debt capital from the public. They are generally secured and carry fixed percentage of interest. Registered debentures, redeemable, debentures, convertible debentures, mortagage or secured debentures, ordinary debentures, etc are a few types of debentures.

Capital subsidy Development Loans

Central Government provides capital subsidy to industries set up in notified backward area.

Unsecured Loans and Deposits

Unsecured loans are normally provided by the promoters to fill the gap between the promoters contribution required by financial institutions and equity capital subscribe by promoters.

Inter Corporate Deposits

It is a deposit made by one company with another, normally for a period upto 6 months. Their usually 3 types:

1. Three month deposit: This deposit is more popular in practice. They are taken up by the borrowers to tide over a short term cash in adequacy. A rate of interest is around 16% par annum.

2. Six month deposit: Normally lending companies do not extend deposit beyond this time limit. They are made only to first class borrowers. The rate of interest around 15% par annum.

3. Call deposit: In theory, a call deposit is withdrawal by the lender on giving day’s notice. But in practice, at least 3 day notice is to be given. The interest rate is around 14% par annum.


A small business can be started at a very low cost and on a part-time basis. Small business is also well suited to internet marketing because it can easily serve specialized niches, something that would have been more difficult prior to the internet revolution which began in the late 1990s. Adapting to change is crucial in business and particularly small business; not being tied to any bureaucratic inertia, it is typically easier to respond to the marketplace quickly. Small business proprietors tend to be intimate with their customers and clients which results in greater accountability and maturity.

Independence is another advantage of owning a small business. One survey of small business owners showed that 38% of those who left their jobs at other companies said their main reason for leaving was that they wanted to be their own bosses. Freedom to operate independently is a reward for small business owners. In addition, many people desire to make their own decisions, take their own risks, and reap the rewards of their efforts. Small business owners have the satisfaction of making their own decisions within the constraints imposed by economic and other environmental factors. However, entrepreneurs have to work very long hours and understand that ultimately their customers are their bosses.

Several organizations also provide help for the small business sector, such as the Internal Revenue Service’s Small Business and Self-Employed One-Stop Resource.

The small business has also many advantages over its larger counterparts. It does not have access to huge resources, numerous employees strong financial backup, or the professional management of the big businesses, but it does posses some distinct advantages that are only its won. Because of small percentage of income that goes for overhead and non-revenue-producing activities, there are still some functions that can be performed more efficiently by small business enterprises than by large ones.


Small business helps entrepreneurs develop as an individual and expand their personal abilities. Their growth might have been hampered had they been employed under the guidance of a supervisor in any other organization. Ambition also motivates entrepreneurs and makes them hang in there.

Provides self employment opportunities
Small business helps people provide job for themselves. Sometimes employment opportunities are limited in big industries. There are losing big firms that are frequently cutting back, closing plants, and laying off people. This creates unemployed people in society who are otherwise capable of performing various jobs. The area of small business can provide a much-needed source of new employment. This shows the important contribution the smaller firms are making to their respective notional economics.

Large corporations often lack the flexibility of small business because of the complex organizational structure, established bureaucracies, and high overhead costs. Decision making in the small business frequently depends on only one or two persons. The management and the workforce in the small business may be more adaptable to change than those of the large corporation. They can react more quickly to changing market conditions or to modify a product for a customer more easily than could a large business.

Better Inter-personnel Relationships

Both managers and staff in the small business are treated as individuals. Managers are given freedom and decision making and provided with variety of responsibilities. Staffs are encouraged to innovate there by reducing boredom in the workplace. Lines of communication are direct between owners and employees.


Small businesses give its owners the liberty or independence to come go as they please. Owners of small business enterprises have a degree of freedom that are not customary for managers in most big corporations this freedom encourages self-motivation. Often this freedom of small business owners means the right to work harder and longer hours than they would if they were employees of big business. However, the psychological and financial satisfaction arising from enterprise ownership is powerful rewards for the risks of going into business for oneself.

Quick decision

As the owner of the business does all in all in that particular concern, the owner does decision-making mostly. So the decision is taken relatively quickly because he or she does not have to discuss other people or superiors to take the decision.

Disadvantages of small business:

The small business has their share of disadvantages too. These disadvantages have multiplied in the current years due to increased management problem in recent years.

Inability to cope with growth

Sometimes, the factors that are advantageous to small business turn in to serious disadvantage when it is time to grow. Growth often requires the owner to give up certain authority. Similarly, growth also requires specialized management skills, which the owner may lack.

Management problem

Effective and efficient management is very important for the smooth running of any kind of business. A new businessperson often has the knowledge and skill to produce a good but will lack the necessary kills of planning organizing, staffing, directing and controlling. Yet the small business owner is often forced to become a generalist in management since he or she can’t afford to employ a specialized person having necessary managerial skills. Also they do not give the subordinates enough responsibility to manage.

Shortage of working capital

Shortage of working capital is the most predominant limitation of small business. For this limitation, they cannot take the advantage of economics of scale. They cannot take the advantage of discounts given for bulk purchases. This leads to the inability to cope up with their larger competitors in new facilities, equipment, tools, and methods.

Lack of coordination

Another disadvantage is the lack of coordination between production and marketing. That is the failure to balance and coordinate these to critical functions. It is important for small business to keep judicious balance among:

Having too few products so that the orders of potential customers have to be turned down.

Having too big inventory as to bear too much inventorying and maintenance cost.

Diversifying too fast. The advantage of diversification and the advantages of product specialization should be balanced.

Lack of effective selling techniques

Small businesses usually don’t have the access to specialized person at marketing. So, they lack in scientific market research, specialty advertising and personal selling. As a result sales are comparatively lower than the larger enterprises. Location of the head office and the accessibility does affect the sale to certain degree.

Situation Leading to Formation of Small Business:

The formation of small business is a result of certain situational advantages it enjoys. These advantages help small businesses to be a part of any economy. Apart from relaxed government policy, the followings are the situations where small businesses have an edge over their bigger counterparts.

Introducing new product or idea

There is always a risk involved in introducing a new idea or product. In case of a radical innovation, market reaction and consumer acceptability need to be tested. It is therefore, preferable to introduce the product through a small firm, which ensures less risk factor on investment.

Having a Local Market for the Commodity offered

In certain form of business, operation in a larger market is not economically viable. For instance, it will not be economical for a restaurant to sell its product to a large market. Such scale of operation exceeding the local demand would cause inefficient use of resources. Therefore, a small firm does better in a small scale.

Availability of Limited Market

When the market is limited, small business is the best choice. In a monopolistic competitive market there is little possibility to grab a substantial market share. In such case, small business offers better returns. While preparing this report we had to go to a couple of Small Business firms. We ask them several questions about the problems they usually face in launching and operating a Small Business firm. There answers were quite a bit similar. But they talked about several of problems. We came to know about the common problems faced by Small Business firms in Bangladesh. We went to:

1. ‘Key-Kraft’ – a boutique and fashion house,

Aishan Shopping Complex,

Malibagh, Dhaka – 1217.

The persone we talked with: Md. Shakhawat Hossain.

2. ‘Zamdani’ – a Zamdani Sharee manufacturing and retail house,

Section 13, Mirpur,

Dhaka -1216.

The persone we talked with: Khandaker Rauf.

3. ‘Dotcom’ – a cyber cafe and software developing firm,

Road no 1, House no. 23, PC Culture Housing Society,

Shekhertek, Dhaka – 1207.

The persone we talked with: Tanvir Hussain.

4. ‘Adarsha Murgee’ – a firm for broiler chicken,

Vill. Chandana, PO. Chandana,

Gazipur – 1702.

The persone we talked with: Md. Kanchan Howleder.

For better understanding we will present this section in a different way. We made a questionnaire and the above persons answered these questions. The questions were as follows:

1) How did you manage your capital?

2) What problems do you face in collecting raw materials?

3) Is political instability affecting your business?

4) What is the effect of our social insecurity on your business?

5) Do you have any problem in distribution and transportation?

6) How do you manage labor problems?

7) What technique do you follow to increase sell?

8) What is your future plan?

Their answers are going to be discussed now:

Our first question was about collecting capital for the business and we got most frustrating answer on regarding this question. Three of the above four had to collect their capital from personal financing source.

They used their personal deposit and then borrowed from their friends. For example Mr Shakhawat from ‘Key-Kraft’ just hates commercial banks as a source of financing. He started his fashion house a couple of year back. At first he took the position of that shop and had only ninety thousand taka in his hand at that time. Then he applied for the loan. Bank officials answered positively and told him to decorate the shop to make it attractive to the customer. He then decorate the shop by an famous interior designing firm spending the rest of the money he had in his hand and borrowing some more from the friends. After decoration the bank officials deny to give him the loan saying that the place chosen for the shop is not very appropriate for a fashion house. It was totally unexpected to him and he got a great shock. He felled in a great problem that he already spent his entire fund hoping to get the bank loan. “I can’t even sleep at night thinking for the money. I need to refund the loan I took from my friends. But I don’t had nothing in my hand” said Mr. Shakhawat. Then he sold his motorcycles and some of the home appliances he used personally. He also had to sell some of his land in his village. After that we all know the rising story of ‘Key-Kraft’. Now it is a leading fashion house of the city. It enjoys a turnover of more than two million taka per year and it is receiving a more than ten percent of increase in sale each year. At Gazipur we got totally a different story. Mr. Kanchan recieved a loan of twenty thousand taka from ‘Grameen Bank’ Joydevpur branch. He had his own land there and established a broiler firm. Now one can go there to hear his success story. He repaid the loan in time also. The rest two Small Business firms we visited did not respond positively about a loan from the bank. They had to finance from their personal fund. But all of them told about this capital problem and identified it as the major obstacle for this sector.

We found the problem for raw material is the second major problem that a Small Business firm face, identified by Mr. Kanchan. According to him this is actually the basic problem for all Small Business firm concerning agricultural production. He personally suffers from very instable supply of food for his chickens. It is not possible for a farmer to produce the food for his chickens as well as producing egg and meat. He must depend on somebody for chick food. “Sometimes we don’t know what to feed my checks next morning”. Though he is willing to pay quite a handsome amount of money for these but there is no sufficient supplier for this. It is a very disturbing problem for Mr. Rauf also. He needs sufficient quality thread to make a ‘Sharee’. But in this sector everything is against them. He never get the thread in time. As it needs a different kind of thread to make a ‘Zamdani Sharee’ it is not possible to by available thread from market. He must depend on limited suppliers and sometimes on the government. Very often he doesn’t get the supply and there is nothing to do but stop the production.

All the Small Business firms we visited identified political instability as the third obstacle to Small Business development in Bangladesh. It is not possible for them to run the business in this condition. Mr. Kanchan said that his 1300 chicken died in the 1995.That time his business was new and it was a very big loss for him. Mr. Tanvir told very angrily about problems from political instability in his business. His business is depending on customer service. No customer no profit. Here is no chance to produce a good and sell it later. In ‘Hartal’ he cannot open the shop and so a great loss. As he bought twelve computers for the browsers it needs a big fixed cost. If this condition goes on he may be declared as a bankrupt. He is an example that how a enthusiastic entrepreneur can become a bankrupt by a bad system. The rest two also complained about this unhealthy condition.

Last June Mr. Shakhawat had to stop his fashion house for 22 days. This is all about the social condition of Bangladesh. “Every month I need to pay around ten thousand taka to various toll collectors”, said Mr. Shakhawat. This happens so often that it is no more a abnormal matter to us. Now a days we call these illegal too collectors as ‘Chandabaz”. Mr. Tanvir had to pay around 50 thousand taka to these gunmen at the beginning of his business. “These people are making our life hell”, said Mr. Rauf. “They take several thousand taka each month, moreover sometimes they take costly ‘Sharee’ without any payment. “We people are trying to protect them as much as we can but it is not so easy a job”, said Mr. Kanchan from whom some gunmen took 50 chicken for their picnic last January.

About transportation Mr. Kanchan has a lot of complain. Sometimes his chickens die before reaching to the city. ‘Zamdani Sharee’ also suffers from lack of transportation. Labor affair is another problem. Skilled labor is a basic need for a Small Business firm. Mr Rauf told they suffer from this problem very much. It takes a couple of month’s time to train up a obis labor. But after learning period many of them leave the job without any prior notice. It is very disturbing. Sometimes a few labors try to interfere about the internal management and about the production. This is really unexpected. As giant companies can do the Small Business firms cannot spent a lot of money in advertising. They emphasis on personal selling. This sector doesn’t get much exposer for their product.

The last question is about the future plan. Here we were a bit surprised that none of them could tell us about a definite future plan about their business. All of them uttered some common words saying that I will try to increase sale and expand my business. From them Mr. Rauf told about an interesting plan that he would try to make his ‘Zandani’ the most exportable item of Bangladesh.

In addition to ensuring that the business has enough capital, the small business owner must also be mindful of contribution margin (sales minus variable costs). To break even, the business must be able to reach a level of sales where the contribution margin equals fixed costs. When they first start out, many small business owners under price their products to a point where even at their maximum capacity, it would be impossible to break even. Cost controls or price increases often resolve this problem.

In the United States, some of the largest concerns of small business owners are insurance costs (such as liability and health), rising energy costs and taxes. In the United Kingdom and Australia, small business owners tend to be more concerned with excessive governmental red tape.<href=”#cite_note-4″>[5]

Another problem for many small businesses is termed the ‘Entrepreneurial Myth’ or E-Myth. The mythic assumption is that an expert in a given technical field will also be expert at running that kind of business. Additional business management skills are needed to keep a business running smoothly.

Still another problem for many small businesses is the capacity of much larger businesses to influence or sometimes determine their chances for success

As we got some real life idea now we will try to find out where the problems actually lie. In Bangladesh there are a lot of Small Business firms but all of them can not succeed in their business. It is very hard to operate and make a business profitable here. It is also not very easy to start a new Small Business firm. In this part we will try to identify the key problems that a Small Business firm faces in its establishment and operating period.

The major problem a Small Business firm faces in its establishment period is the problem for capital or sufficient financing problem. The key to a Small Business success rests mostly on the ability of the entrepreneur to raise adequate amount of fund for infrastructural development as well as meeting the day to day working capital needs. One of the first questions any potential entrepreneur must ask is, “How do I get the money”? The type of the business may be anything but the money necessary for finance is must. Without necessary fuel (money) no ship (Small Business firm) can run. Plant or fixed asset, financial needs include purchasing land and buildings, machinery and equipments, furniture, vehicles etc all of these require a huge amount of money. In a country like Bangladesh it is not very easy to arrange a satisfactory capital to buy all these. As it is about Small Business, there is no chance to raises the capital from share market. Only personal and family funds and personal loan from the friends are major source. But in this way it is very hard to raise a sufficient amount of capital.

As we use to see Bank as a financing agent, it is very normal to think that one can get a loan easily from the bank. But the true story is far from this imagination. It is really a hard job to get a loan from a commercial bank for a Small Business firm. It is almost impossible for an inexperienced entrepreneur to manage a loan from a commercial bank. There are a lot of formalities and paper works need to be completed to get a loan. If any one wants to apply for a loan he must show some influential guarantor, a certificate of citizenship, character certificate, certificate of previous business experience, a letter of permission for the business from authority etc. with the application paper. Sometimes it is also necessary to make (?) please the associated officials of the bank. All of the work needs to be done before getting the loan. After doing all these no one can assure about the loan to be sanctioned. There are some other inner stories too. Actually banks and other financial institutions are not really interested about giving a loan for a Small Business firm. But they are ready to help the BANKRUPTS.

There are some other sources for finance – micro credit by NGO, charitable foundation, bond, Small Business financial bank, trust company, mutual fund etc. From all these except NGO none of them have any good record of financing Small Business. But there are some problems with NGO. Although they claim that they have a very high percentage of returning loan back but its only the one side of the coin. The other side says quite different a story. Sometimes they distribute loan to very much needy entrepreneurs in a high rate of interest. It is also often said that some NGOs practice some unfair way to get their loan back. They create much pressure to refund the loan. Sometimes they take away personal property of the loan receiver on force if he is unable to pay back the loan. A few debtors even got suicide enabling to refund the loan.

Lack of necessary raw material is another problem. Everyone need run and run for raw materials. Here we don’t have a definite supply chain of raw materials and the producers. Entrepreneurs are ready to pay necessary money for it but there is no instable supply. Sometimes there is nothing found when necessary, sometimes all are very high in price and sometimes adequate raw materials are in the market and it is more than necessary.

Another major problem of Small Business development in Bangladesh is lack of necessary government planning’s to up this sector. 31 years already have been passed after our independence. But still today we suffer from sufficient planning. Company and Small Business is very different. So this sector needs a special attention from the government. The procedure of distributing loan is not very easy. Still there is no plan that how many Small Business firms is to be financed each year. Government finished their duty by installing a few training center for potential entrepreneurs. But the central controlling is inadequate. There is nobody to monitor the whole activities. No one to suggest that how many entrepreneurs should be trained for what.

Every business needs some power supply and some other public utility services. Electricity, Gas, Water, Telephone etc. are some prerequisites for a business. In Bangladesh only the sufferer know how tough it is to get those connections. You need to pay a handsome amount o bribes to a invisible hand. In case of telephone you might have to wait for more than years to get connected. All these hazards are hampering the Small Business sector in Bangladesh.

Political and social instability is another big problem. Whether it is a giant company or a Small Business the success of a business is greatly dependant on the political and social stability of a country. Every business firm is dependent on production or purchasing and selling. This is the blood stream of a Small Business firm. If any of these two is stopped no Small Business can exist. It is possible for a giant company to stop all its operations for a couple of months and then start it again. But a Small Business firm can not do this. In Bangladesh our political and social climate is not stable at all. There is a condition of pre-war between the ruling party and the opposition. Always they are face to face with each other. Very often they call ‘Hartal’ and strikes. Such a loss can not be sustained. In the period of 1991-1996, 173 days of ‘Hartal’were been called in total. It was 140 in 1996-2001 sessions. This is almost impossible for a small business firm to continue its operation in such a condition. They can not sustain this loss.

Now a day’s terrorism is becoming the cancer of Bangladesh. Above discussed political instability is the reason for it. This terrorism is also hampering this Small Business very much. Toll collectors are very daring and create pressure on the businesses to collect illegal tolls. As the Small Businesses already suffer from lack of financing it is similar to death to them when they have to please the toll collectors. There are terrorists and toll collectors all and everywhere in Bangladesh. If one tries to launch a Small Business firm he needs to pay these tolls in a number of places. Otherwise those people may stop its operation and sometimes more. One need to pay for it while buying or constricting a house, purchasing raw materials, transporting to the factory, selling a good; in all places. There are also weekly, monthly or special tolls in any religious festival one need to pay. Terrorists are becoming daring day by day. In recent times they kidnap entrepreneurs and businessmen if they don’t get the money. This condition is a serious obstacle for the development of Small Business in our country.

Now let’s have a look at some internal management problems of Small Business firms. From any giant company to a cottage shop good management is a must for success. It is a challenging job to manage a Small Business firm here as they need to compete with giant companies. Management people should know all the arts of management. In our country higher study on business management is a new concept. Bachelor degree in business administration is being awarded form IBA for eight years. So a lot of management personnel of Small Business firms are without any formal management study. They are not capable of managing, specially a Small Business firm. They cannot take appropriate decision in the right moment. These under trained people create a lot of problems.

  • -Cannot identify target market or target customer.
  • -Does not plan.
  • -Believes advertising is an expense not an investment.
  • -Only primary knowledge of pricing policy and strategy.
  • -Cannot identify trading area.
  • -Cannot delegate.
  • -Believes loan would solve every problem.

All these problems are usually created by an unskilled management people. And it is it is more that skilled people are not available in the market.

Another common problem of Small Business development in Bangladesh is problem of distribution of goods. It is natural that a new product needs to go through a strong completion from other similar products. Small Business firms suffer from lack of distribution as they cannot compete with the giants. Another point is about our customers. They are very conservative and very much brand loyal.
These are the major problems that our Small Business firms usually face while operating.

Small business bankruptcy

When small business fails, the owner may file bankruptcy. In most cases this can be handled through a personal bankruptcy filing. Corporations can file bankruptcy, but if it is out of business and valuable corporate assets are likely to be repossessed by secured creditors there is little advantage to going to the expense of a corporate bankruptcy. Many states offer exemptions for small business assets so they can continue to operate during and after personal bankruptcy. However, corporate assets are normally not exempt, hence it may be more difficult to continue operating an incorporated business if the owner files bankruptcy.

Through analyzing our workings and conducting the survey the following situations are found.


Poor access to credit: this is one factor that has been continued to be pointed out as one of the major reason.

Water and gas is also in the same poor condition. This has caused the businesses to look for alternative and back-up services to support their businesses which in turn increase their operating cost significantly. With rising fuel cost the expense is putting real dent in their profit figures. The service disruption due to these shortages also causes severe problems.

Lack of efficient distribution channels: Bangladesh has one of the flattest land structures in the world. The lack of obstacles (hills, desert etc) and presence of cheaper transportation option (waterway) makes the country any supply channel manager’s dream. But unfortunately the real picture is somewhat different. The businesses lose near 40% of the perishable items due to lack of efficient distribution channel. Lack of supply chain management knowledge, a weak transportation system, and corrupt road authorities are some factors that contribute to make the system inefficient.

Imperfect market: Market imperfection bleeds the businesses specially the small players the most. Dominance of the middlemen in the value chain often cost price distortion. It is a common scenario for the product to be sold at a significant premium while the producers take on a huge loss. Lack of information and the control exercised by these forces cause severe problem for the local producers.

Lack of governance: In a world bank online debate a commentator said, “Corporate governance is not only relevant but essential for low-income countries. The problem is not the stringency of rules but of the governors themselves”. Governance is a serious issue

Lack of proper business knowledge: Most of the entrepreneurs of Bangladesh apply the traditional hit and miss approach with their businesses. They have little institutional knowledge and have little access to training as very few organizations offer quality facility. In absence of know-how relating to general accounting, branding, taxation, law etc the businesses tend to miss the opportunity that the regulatory environment offers. Internet can play a vital role here for knowledge dissemination but the access to the net is not that easy.

Corruption: There is very little to add in this point since there is so much uproar from every kind of media about how corrupt the country is. Corruption is probably one of the biggest problems faced by the organizations. The recent drive against corruption is encouraging but unfortunately this is focused around the urban centres whereas the rural corruption is still rampant.

Poor law and order situation: Having a sound law and order situation help flourish business. But the situation has deteriorated over the years. Recent drive to improve the situation has helped but it has done damage to the business communities’ confidence.

Frequent policy changes: Policies formulated get changed with the government. As there is serious antagonism between the main two parties, they tend to undo the work done by their predecessors. This causes pain to the business community as the high investment projects require serious policy consideration and longer payback period and such changes can create havoc for the project that is holding the local entrepreneurs back. It’s a nightmare for a fresh-blood to get access to credit. The 48 bank rich banking sector has 30 private commercial banks; most of them target the urban market. The private players are uninterested to move to the rural settings. But fortunately this is changing, due to the Bangladesh Bank regulations and strong remittance growth from the migrant workers these banks are finding the opportunity in this market and making a move for rural expansion. But the access to credit is not getting easier. The banks are not interested in providing credit to the small investors because of collateral issues and the high cost involved in processing the loans. The small investors also lack proper knowledge of how to access the financial institutions.

Inadequate infrastructure facilities (power, water & gas): Infrastructure is always a big headache for the urban and rural businesses. To fuel her ambition of maintaining a growth rate of 7%, Bangladesh will need to add 2000 MW additional energy each year. In 2007 the peak demand for electricity stood at 4500 MW whereas generation was stagnated at 3,717 MW. The result is service disruptions and blackouts on almost every single day of the year. At 147 KWH Bangladesh has one of the lowest per capita electricity consumption in the South-East Asia. Only Nepal has lower consumption than Bangladesh with Bangladesh from the very beginning. Poor governance is one of the key points what makes the firm unattractive to investors. The existence of nepotism in the business circle is also something which makes a firm weak. It is a common trend among the business community to fill up the existing positions within the firm with their relatives who may not be suitable for the post. By separating ownership from management businesses can create a better and effective venture.

Tax structure: The tax structure of Bangladesh offers little intensive for a business. According to the JETRO survey Bangladesh holds the second highest corporate tax rate among the Asian countries (even after the government has cut the rate to 37.5%).

Lack of connectivity: The world has moved on to connect itself to the World Wide Web whereas Bangladesh is lagging far behind. Across the world innovative business are emerging using a clicks and mortar business model. They are leveraging the full potential of the World Wide Web. As the access to high-speed internet connection becoming cheaper by the day around the world the story is quite different for Bangladesh. Businesses have to pay a handsome amount in fact one of the world steepest fees to get access to the web. But the scenario is changing in the consumer front. Consumers now have access to the web through their cell. There is a huge opportunity to cater to the foreign customers by displaying the product in the web. But the high-speed internet connectivity is yet to reach the acceptable standard

Bureaucratic hassle: Bureaucracy and red-tapism has taken its toll for Bangladesh business environment. Opening a business on an average takes 74 days. Getting a license takes a staggering 252 days.

Political instability: According to a UNDP research strike has led to 3-4% GDP losses during the 1990s. There are about 611 strikes during 1995 to 2002. This creates immense burden on the business firms as the shops often get vandalized during strike violence.

Natural Disasters: Sheer density of the country’s population- 2,639 people per square mile- makes any natural disaster