2018 04 ITcon Acquah

SME Financing Constraints: Evidence from Survey of
Construction Firms in Ghana

Alex Kojo Eyiah
Department of Built Environment
Pentecost University College, Accra, Ghana
Email: dreyiah@yahoo.com
Nongiba Alkanam Kheni
College of Technology
University of Education, Winneba, Kumasi, Ashanti Region, Ghana
Email: nakheni@uew.edu.gh
Richard Acquah
Department of Built Environment
Pentecost University College, Accra, Ghana
Email: richacqauh1@gmail.com
Abstract
Small and medium enterprises (SMEs) play a significant role in a country’s social-economic
development. Unfortunately, they are restricted in accessing the capital they require to function
effectively in the construction industry. This study investigated the situation from the
perspective of contractors operating within the construction industry in Ghana. The
quantitative approach to research was adopted using survey questionnaires. With a response
rate of 48 percent from 400 questionnaires distributed, the paper gauges the perception of
construction firms on the financing constraint and the factors contributing to such constraints.
The Chi-Square test was employed to ascertain whether there existed significant differences
between the personal and organisational characteristics of firms and financing challenges. The
challenges associated with financing of construction firms are multifaceted. To a large extent,
the financial class of construction firms was related to their financing constraints. Efforts to
mitigate the problem need to be addressed holistically. Perhaps, it is about time consideration is
given to establishing a specialised bank for construction. Such a bank would understand the
peculiar nature of the construction industry to be able to handle the associated risks. The
government, and interested development agencies, has a role to play in ensuring the success of
such bank.
Keywords: construction firms, financing constraints, Ghana, SMEs.
JEL codes : G29, G32, G40, L25
Introduction
The significant importance of small and medium enterprises (SMEs) to a country’s
socio-economic development is now well established. The important role played by
small and medium scale construction firms in the development process is equally
International Journal of Small and Medium Enterprises and Business Sustainability, Vol.3, No.2 (July 2018), pp. 23 - 47
© 2015-2018 by Center for Industry, SME and Business Competition Studies, USAKTI
ISSN:2442-9368 electronic
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acknowledged (e.g. UNCHS, 1996; Juanzon and Muhi, 2017; Asante et al., 2018). Juanzon
and Muhi (2017) describe them as the core of the construction industry development
and play a main role in urban and rural building. Unfortunately, studies have revealed
that there are institutional barriers and challenges associated with the financing of this
group of enterprises, which is affecting their development (e.g. Larcher, 1999;
Hassanein and Adly, 2008; Bondinuba, 2012; Essilfie-Conduah, 2016; Quartey et al.,
2017). Review of the extant literature reveals that the problems are multifaceted and
differ across economies. Although not fundamentally different, their findings imply that
a homogenous solution is unlikely to succeed across countries. This is mainly due to the
fact that the nature of the SME sector, level of economic development, and status of
financial intermediary systems differ across countries, giving rise to differences in the
type and intensity of factors that impede SME access to finance.
Most interventions are based on the supply side constraints (Mensah, 2004; Abor
and Biekpe, 2006; Essilfie-Conduah, 2016), paying less attention to the demand side
constraints that arise from SME inherent characteristics (Nyanzu and Quaidoo, 2017). If
demand-side variables also play a role in SME’s financing problem, providing finance
would solve only part of the problem. Essilfie-Conduah (2016), for instance, reported
that in Ghana despite various financing schemes access to finance remains a key
constraint on SME growth and effectiveness. It is also observed that studies on the
subject have tended to lump SMEs together, as if they were a single unit. The distinction
is only established during analysis where firms are categorized into industries:
manufacturing, agriculture; service; mining/construction etc. Each industry has its
peculiar nature, procedures and structures, and therefore needs to be treated
separately.
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Though literature on small and medium scale construction firms’ access to finance
problems abounds, research on the extent of these challenges is a grey field, at least from the
Ghanaian context. The paper thus provides empirical evidence on the barriers and challenges
to financing small and medium scale construction firms and how these relate to their personal
and organisational characteristics. It is hoped that the findings would be useful to policy
makers and interested development agencies in the design and implementation of future
financing schemes for construction firms. The rest of the paper is organized in six sections:
the first section briefly review SME financing constraints. Then, the one considers the factor
contributing to the SME financing constraints; the third section looks at the relationships
between the business characteristic and the financing constraints. We then describe the
methodology in the fourth section, and the fifth section presents the results and discussions.
Finally, we present the conclusions.
Literature Review
SME Financing Constraints
The challenges associated with financing SMEs dates back close to a century. The
Macmillan Committee (1931) concluded in their report that small businesses were
unable to secure external finance for long periods. Radcliffe Committee (1959)
supported and added another dimension. SMEs, as a source of inventions, were unable
to secure funds to finance new commercial innovation. Subsequent studies have
confirmed these findings. Bigsten et al. (2003), using data from six African countries,
found that among firms which applied for loans, small firms had substantially worse
chances of being successful. Berg and Fuchs (2013) also used data from five Sub-
Saharan African countries and found that the share of SMEs in loan portfolios of
respective banks was less than 25%. Similar trends have been found in many countries,
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which are affecting the growth and development of SMEs (Wang, 2016; Quartey et al.,
2017). The phenomenon is generally referred to as ‘financing gap’.
The subject is studied extensively in Ghana (e.g. Thomi and Yankson, 1985;
Anheier and Seibel, 1987; Steel and Webster, 1992; Baah-Nuakoh, 1993, Aryeetey et al.
1993; Mensah et al, 2015; Fuseini, 2015; Nyanzu and Quaidoo, 2017). Thomi and
Yankson (1985) found that majority of their sample firms lacked access to finance
which limited their growth and expansion. Even under financial liberalization, majority
of SMEs had difficulties raising finance (Steel and Webster, 1992). Aryeetey et al. (1993)
found that only 10% of SMEs that applied for finance had their application considered,
and that only 1% received funding. Fuseini (2015) reported that less than a quarter of
SMEs surveyed had access to credit.
Factor Contributing to Financing Constraints
The reasons for the financing gap are normally addressed from information perspective
(Binks et al., 1992; Binks and Ennew, 1996; Abor and Biekpe, 2006). Abor and Biekpe
(2006) explain that information asymmetry is the disparity between the information
available to businesses seeking capital and suppliers of capital. Faced with this
uncertainty, a lender may sometimes deny credit to firms that are creditworthy but are
unable to make a good case. Binks and Ennew (1996) note that the areas for which
lenders require information relate to management, the market and finance.
Management information refers to assurances as to the competence, experience and
credibility of the management of the business concerned. Market information refers to
the conditions for the product or process concerned and also the supplier markets
involved. Financial information refers to financial ratios, cash flows, profit and loss,
balance sheet and forecast, and capital budget. Matamanda and Chidoko (2017)
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reported that banks require SME loan applicants to have financial statements and
capital budgets so that they can assess their financial planning and credit worthiness.
Olomi et al. (2008) identified three categories of constraints limiting SMEs access
to finance. The capacity of the SMEs themselves in terms of their low level of knowledge
and skills, under-developed business culture, lack of separation of business from family
or personal matters, limited documented credit history and tendency for them not to
explore all financing options available. The second relates to limited competent
personnel. The third relates to deficits in the enabling environment in terms of laws,
absence of national identification system and credit reference bureaus. Fatoki and Smit
(2011) also categorise the factors into; internal and external. Internal factors include
business information, collateral, networking, and managerial competences. External
factors constitute the legal environment, crime and corruption, ethical perceptions, and
macro-economy. Other studies associate the situation to lack of technical capacity of
banks servicing SMEs (Weidig, 2011).
The barriers SMEs face include complex loan application process, unfavourable
interest rate and high collateral requirement, complex application procedures small
loan size and short loan maturity period (Fuseini, 2015; Wang, 2016).
Studies conducted in Ghana have revealed similar contributing factors (e.g.
Hammond and Odei, 1996; Ackah and Vuvor, 2011; Cofie 2012; Torgbor, 2014; Mensah
et. al. 2015; Avevor, 2016). Ackah and Vuvor (2011) reported that SME were unable to
provide the information required by banks, which included audited financial statement.
Mensah et al. (2015) sort the perception of both the SMEs and Stanbic Bank (Ghana)
and concluded that the SME challenges are in two categories. The first contained
challenges perceived to be faced by only SMEs. These included lack of collateral; stringent
lending criteria set by the bank; short loan repayment period; and lack of guarantors. The
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second category contains challenges perceived to be faced by SMEs and Stanbic Bank. These
included inflation; lack of adequate capital, high interest rate on loans and in the capital
market and exchange rate fluctuation.
These finding compares well with the challenges small and medium construction
firms face in their attempt to raise finance (Eyiah and Cooke, 2003). Many are unable to
adequately provide the required information so financial instructions could effectively assess
their application. The capital needed to effectively execute the project cannot be scientifically
established. Also, planning is virtually absent at the project and organisational level. The
nature and uniqueness of the industry compounds the problem. Even in the best of times,
factors including revenue swings, lack of continuity of work, delayed payment for work done
and the volatility of the construction industry have all affected financing in the industry. The
negative altitude of some contractor has also in general damaged their reputation.
In South Africa, Balogun et al. (2016) reported that sampled construction firms
indicated there was information barrier between themselves and financial institutions.
Their lacked of managerial skills was a barrier to access of credit facilities. They were
expected to provide collateral as security, cash flow statement, audited f inancial
statement and business plans but were unable to do so. A significant percentage of
respondents indicated that loans were not readily available. Majority of those successful
indicated that loans offered were not affordable. Bondinuba (2012) reported, in his
study of Ghana, that the inability of small and medium scale construction firms to
provide collateral and information such as audited financial statement made it
extremely difficult to access finance. Ofori et al. (2017) also reported, in their study of
Ghana, that construction firms continue to experience financial challenges and not much
has been done to solve these challenges.
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Financing Constraints: Business Characteristics
The term ‘business characteristics’ is being used to refer to (i) the organizational
characteristics of the business and the: (ii) personal characteristics of the owner -
manager. These include age and size of the firm. Others are the educational background
of the owner and the training attendance. The smaller and/or younger th e firm the
lower the value of assets that can be used as security (Bannock, 1981; Binks et al., 1992;
Ackah and Vuvor, 2011), and consequently they are more likely to face difficulties in
raising finance. Age of the owner-manager was negatively related to the success in
obtaining finance (Hustedde and Pulver, 1992): older owner-managers were less likely
to obtain finance.
Kuntchev et al. (2012) used data from the World Bank’s Enterprise Survey,
covering 13,685 companies across 38 sub-Saharan countries. They observed a strong
correlation between the size of a business and their access to credit. Smaller businesses
were more likely to be constrained. Beck et al. (2006), using a sample data of over
10,000 firms from 80 countries, found that the size, age and ownership of firms are the
factors that explain and predict the obstacles that SMEs face in securing finance. Larger
and older firms enjoy increased access to finance. Silva and Carreira (2010) revealed
that the size of a firm is highly significant in influencing the firm’s financial constraints
whereas the age of the firm had no significant impact.
Wang (2016) found that ‘high growth enterprises’, ‘age’, ‘employees’ and
‘ownership’ were all significantly correlated with access to finance. Size and age were
negatively correlated with a ‘severe’ level of the financing constraint. Quartey et. al.
(2017) in a country level analysis of their study of sub-Saharan Africa SSA, found that
older firms were less likely to have difficulties in accessing finance compared to newer
firms. Larger firms were significantly more likely to gain access to external finance
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relative to smaller firms. They found that access to finance was significantly influenced
by factors such as firm size and formality in Ghana; significantly driven by firm size,
gender of top manager, and formality in Mali; ownership, experience of top manager,
formality and firm performance in Senegal; and firm age, ownership, and experience of
manager in Gambia. Education helps to enhance the exploratory skills, improves
communication abilities and foresight and would have significant influence in financing
constraints. Small businesses that sought advice before applying for finance were more
likely to be successful (Curran and Blackburn, 1994; Rostamkalaei and Freel, 2017).
Methodology
This paper is part of a larger study investigating the financing practice, preference and
constraints of small and medium sized construction firms. The quantitative approach to
research was adopted for the study using survey questionnaires. In Ghana construction
firms are categorised into financial class 1, class 2, class 3 and class 4, based on their
resource capabilities. Class 1 is the largest and class 4 the smallest. Firms are also
categorised, based on the type of project they undertake, into buildings or roads
construction firms. A firm can decide to undertake both road and building projects. In
the general sense of the term SME, almost all construction firms in Ghana can be
described as such. However, there are few indigenous construction firms in financial
class 1 who can be compared to expatriate firms most of whom cannot be said to be
SMEs. In this sense, this study focused on only class 2, class 3 and class 4 construction
firms as the subjects for investigation.
There has always been a challenge in obtaining a comprehensive list of
construction firms operating in Ghana. Therefore, a multi-stage non-probability
sampling technique was adopted. It involved purposive, convenience and snow balling
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sampling techniques. Officials within government construction agencies and private
consulting firms were used to reach the subjects. Snowballing was used b y requesting
respondents to suggest other subjects. Like approach has been used successfully in
quite a few other studies (Greenhalgh et al., 2004) and yielded substantial results. A
total of four hundred (400) questionnaires were deposited at the offices of construction
agencies and consulting firms to be handed to contractor for completion.
In section A of the questionnaire, respondents were asked questions regarding
their background and the characteristics of their firms. These include financial class,
number of years in business, type of projects, use external advisors, number of
employees, route to becoming a contractor and training attendance. Section B requested
answers on whether or not respondents’ had applied for finance, whether they were
successful, and the preparations they made towards the application and the use of
advisors. Respondents were to express their level of agreement under a Likert scale
coded 1–5 on constraints in raising finance and factors contributing to the constraints.
The questionnaire was articulated in a way that would make it easily comprehensible
by subjects. It was tested, and adjustments made where necessary.
Reponses were imputed into Statistical Package for Social Science (SPSS) for
analysis. Frequencies, percentages and mean rankings of the constraints in raising
finance, reasons for financing constraints were also calculated to support the
discussion. Cross tabulation was pursued to determine relationships between the
variables. Because of their bulkiness, contingencies tables are omitted in the
presentation of this paper. Chi-Square test for independence was used to test for
statistical significance difference between personal and organizational characteristics
and financial constraint and contributing factors. We adopt Aniekwu’s (1995)
interpretation in determining the relative importance of the variables. A mean of 1.4

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implies no effect, not important; a mean equal to 1.5-2.4 implies little effect, little
importance; a mean equal 2.5-3.4 implies moderate effect, moderate importance; and
mean greater than or equal to 4.5, implies extreme seriousness, extreme importance.
Results and Discussion

This section presents the findings and discussions on the financing constraints of
construction firms. Specifically, the constraints to raising finance, the factors
contributing to the constraints and, the relation with their personal and organisational
characteristics. A total of 190 valid responses were received out of the 400 distributed,
representing 48 per cent response rate.
Constraints to Raising Finance
Generally, the sampled contractors were not denied access to finance. They were,
however, confronted with challenges, which might have resulted in refusal of loan
offers. Figure 1a shows that 85% of respondents had applied for loan. Figure 1b shows
that, of those who had applied, approximately 68% were successful, which is relatively
high compared to the findings of Aryeetey et al. (1993) and Fuseini (2015). Figure 1c
shows that a significant number (46%) of the respondents who were successful did not
accept the offer, suggesting they were probably dissatisfied with the conditions
attached to loan offers.
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Figure 1. Loan Application/Success/Acceptance
Source: fi eld survey.
Figure 2 shows that high collateral requirement, with a mean of 4.50 indicating
an extreme constraint, was the severest problem. The mean of 4.30 observed with
interest rate indicates it is a substantial constraint to contractors when they wish to
raise finance. The mean observed with the period allowed for repayment of loans
(3.29), insufficient funds (3.09) and delays in services (3.02) indicate moderate
constraints when contractors wish to raise finance.
Figure 2. Constraints in Raising Finance
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Reasons for the Financing Constraints
This section looks at the general sample and then the three different groupings of
financial class (class1, class 2 and class 3); route to becoming a contractor
(apprenticeship, business person and professional); type of project (building, road and
both building and road).
Figure 3 shows that delayed payment was the severest factor constraining the
financing of construction firms. Low profit margins on projects ranked second. The
mean of 4.41 is an indication that it has a substantial effect on the financing situation of
contractors and suggests that it cannot be ignored if programmes to support
contractors are to be effective. Figures 4, 5 and 6 illustrate the results from the different
groups of construction firms. Except for the construction profession category, low profit
had a mean of 4.0 or above for all the other categories, with general entrepreneurs
ranking it first, and class 4 contractors, contractors with a construction trade
background, building contractors, and road contractors all ranking it second. The lack of
managerial and technical capabilities of contractors ranked relatively low (seventh),
suggesting they do not attribute their financing difficulties to their own shortcomings.
The mean of 3.43 indicates that it has a moderate effect on the financing situation of the
respondents. Lack of managerial and technical capability ranked ninth with class 2
contractors, seventh with class 3 contractors and eighth with class 4 contractors. Road
contractors ranked it sixth, building contractors ranked it ninth, and contractors
engaged in both road and building projects ranked it seventh. Low capital base ranked
the third most severe factor contributing to their difficulty in obtaining finance. The
severity index of 4.28 indicates that it has a substantial effect on contractors' financing
situation. Class 3 and class 4 contractors all ranked it first, with means of 4.60 and 4.68
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respectively. Class 2 contractors, on the other hand, ranked it relatively low (fourth),
with a mean of 3.69.
Figure 3. Reasons for Financial Constraints
Source: field survey.
Figure 3 shows that lack of continuous access to work ranked fourth with a mean
of 4.03, which indicates it has substantial effect on contractors' ability to raise finance.
Building contractors ranked it first with a mean of 4.53, which indicate that it has an
extreme effect on this group of contractors. General entrepreneurs, class 3 contractors
and class 4 contractors all ranked it fourth, with means of 4.05, 4.01 and 4.27
respectively. The poor track record of contractors ranked fifth among the factors
contributing to the difficulty in obtaining finance. The severity index of 3.91 for this
factor, as shown in Figure 3, indicates that contractors perceive it to have a substantial
effect on their ability to obtain finance. Class 2 contractors ranked it second, and class 3
and 4 contractors both ranked it fifth. Construction professionals ranked it third; those
with a construction trade background ranked it sixth, and general entrepreneurs ranked
it fifth. Road contractors ranked it fourth, building contractors ranked it fifth, and those
involved in both road and building projects ranked it third. Despite the differences in
35
ranking, the respective severity indices indicate that they all perceived the factor to
have a substantial effect on their chances of obtaining finance.
Finally, Figure 3 shows that poor knowledge of lenders on the construction
industry, lack of information on sources of finance, and lack of financial advice services
were ranked relatively low (sixth, eighth, and ninth respectively) in the general sample.
However, the corresponding severity indices indicate that they are potential problems
that would have to be considered if programmes were to be effective.
Figure 4 shows that class 2 contractors’ ranked delayed payments first, class 3
contractors, second and class 4 contractors, third. Despite the difference in ranking, the
means of 4.66, 4.59 and 4.41 respectively imply irrespective of their class contractors
are extremely concerned about this problem. Similarly, as in Figure 5, high means of
4.71, 4.50 and 4.39 were shown for contractors with a construction trade background,
general entrepreneurs and contractors with a construction profession background
respectively. Figure 6 shows that building contractors ranked delayed payment fourth,
which suggests that for this group other factors are of more concern with respect to
obtaining finance. The mean of 4.29, however, still implies it has a substantial effect.
Figure 4. Financial Class: Reasons for the Financing Constraints
Source: field survey

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Figure 5. Contractor’s Route: Reasons for the Financing Constraints
Figure 6. Type of Project: Reasons for the Financing Constraints
Business Characteristics and Financing Constraints
The contingency tables (omitted because of bulkiness) show that in almost all groups of
organisational characteristics, the majority of firms were successful in their application
for finance. However, the majority of firms that had fewer (50 or less) employees were
37
not successful in their application. The Chi Square test results (Table 1) indicate that the
type of project firms undertake has significant relationship with the decision on
whether or not loan offers were accepted. Firms engaged in road projects appeared to
reject loan offers to a greater extent than firms engaged in building projects. The latter,
on the other hand, appeared to reject loan offers more than firms engaged in both
building and road projects. Statistically significant difference existed between financial
class and constraints relating to the amount of funds offered. The larger (in terms of
financial classification) firms were less likely than the smaller firms to face problem
with the amount of funds offered. The smaller and/ or younger the firm the lower the
value of assets that can be used as security and consequently they are more likely to
face financing difficulties (Bannock, 1981; Binks et al., 1992; Ackah and Vuvor, 2011).
The results indicate that statistically significant differences existed between the age of
the firms and constraints relating to interest rates, limit on funds provided and delayed
services. The younger (10 years or less) firms appeared to be confronted with interest
rate and limit on funds problems compared to older (over 10 years) firms. The older
firms have better relationships with banks and would have adequate assets for
collateral and hence would have less constraints in raising finance (Ackah and Vuvor,
2011; Quartey et al., 2017). The younger firms were less likely than the older firms to
face problems relating to delays in services.
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Table 1. Organizational Characteristics: Financing Constraints Chi Square Test Results
Difficulties in Financial Age of Type of Business Use of external No. of region
raising finance class firm project plan adviser employees
Application status .717 .865 .612 1.70 .355 2.43 .005
Offer acceptance 3.60 .564 8.42** .226 2.19 .988 3.74
High interest rate 2.57 11.69** 3.04 3.28 .813 .001 1.11
High collateral .087 2.96 1.83 3.20 .593 .155 1.94
Limit on funds 6.84* 6.72** 2.96 1.62 6.37* 17.46** 2.08
Delayed services 2.69 4.22* 3.81 4.38* 1.71 3.44 .310
Short term 1.34 .33 3.25 20.46** 2.35 2.77 2.18
repayment
Note: * significant at 5% level, ** significant at 1% level.
The results indicate that a statistically significant difference existed between the
existence of a business plan and constraints relating to delayed services, and period
allowed for repayment. Firms that had a written business plan were less likely than
firms that had not to be confronted with delays, and short-term for repayment of loan.
Firms that had not engaged financial advisers were more likely than firms that had
engage advisers to be confronted with constraints relating to limit on funds offered.
This is supported by Curran and Blackburn (1994) and Rostamkalaei and Freel (2017)
who found that small businesses that sought advice before applying for finance were
more likely to be successful. Larger firms (above 50 employees) appeared to be less
affected than the small (50 or less) firms by limit on the amount of funds offered.
Table 2 illustrates Chi Square test results to determine the significance of the
relationship between the personal characteristics of contractors and constraints in
raising finance. The results provide evidence to suggest that there was a statistically
significant difference between route to becoming a contractor and success in loan
application. Contractors with a construction profession background were more likely
than those with a construction trade background to be successful in their application for
loans. The latter were more likely than general entrepreneurs to be successful in their
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application for loans. The Chi Square results provide evidence to suggest that there was
a statistically significant difference between training and constraints relating to interest
rate and period allowed for repayment of loans. Contractors that had attended training
faced problems relating to interest rates to a greater extent than firm that had not
attended training. However, in comparison with firms that had not attended training,
firms that had attended training faced constraints relating to period of repayment to a
lesser extent.
Table 2. Financing Constraints: Personal Characteristics Chi Square Test

Difficulties in raising Route to becoming a Level of education Attendance of training
finance contractor
Application status 5.94* 1.27 279
Offer acceptance 5.39 .406 .129
Hire interest rate 2.59 .071 6.39**
High collateral 3.24 .026 .001
requirement .140 .084 1.32
Insufficient fund .061 .128 .562
Delayed services .077 .020 8.97**
Short term repayment
Business Characteristics and Reasons for Financing Constraints
The contingency tables show that in almost all groups of organisational characteristics,
the majority of construction firms were affected by the factors identified to be
contributing to their financing constraints. The Chi Square test results (Table 3) indicate
that a statistically significant difference existed between financial class and the
perception on the effect of non-continuity of work, lack of information on sources of
finance and lack of information on sources of advice services on financing constraints.
From the contingency tables, class 2 firms appeared to be most affected by the non -
continuity of work. Class 3 firms appeared to be affected to a greater extent than class 4
firms by lack of continuity of work. Class 2 firms appeared to be affected to a lesser
extent than class 3 firms by the lack of information on sources of finance. Class 4 firms
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appeared to be the most affected by the lack of information on sources of finance. Class
4 firms appeared to be affected to a greater extent than class 2 firms by lack of
information on sources of financial advice services. Class 2 firms appeared to be affected
to a greater extent than class 3 firms by lack of information on sources of financial
advice services.
Table 3 indicates that a statistically significant difference existed between age of
the firm and the effect of delayed payment, low profit on project and non-continuity of
work on financing constraint. The older (above 10 years) firms appeared to be affecte d
to a greater extent than the younger firms by delayed payment, lack of continuous
access to work, and low profit on projects. The Chi Square results provide evidence to
suggest that a statistically significant difference existed between the type of proje ct and
the effect of delayed payments and lack of information on sources of finance in
obtaining finance. The chances of firms engaged in both building and road projects in
obtaining finance appeared to be affected to a greater extent than firms engaged in only
building projects by delayed payments. The chances of firms engage in only road
projects in obtaining finance were the least affected by the delays in payment. In
comparison with firms engaged in building projects, the chances of firms engaged in
both road and building projects in obtaining finance seemed to be less affected by the
lack of information on sources of finance. The chances of obtaining finance by firms
engaged in building projects seemed to be affected to a lesser extent by the lack of
information on sources of finance than firms engaged in road projects.
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Table 3. Organizational Characteristics: Reasons for the Financing Constraints:
Chi Square Test Results
Contributing factors Finance Age Type of Use of No. of Region
class of firm project external emp loyee
adviser
Delayed Pay ment + + + + + +
Low profit on project 4.09 4.26* 1.77 .058 .110 1.17
Low capital base .480 .298 2.72 10.51** .046 2.08
Non-continuity of work 5.85* 6.14** 4.39 .121 2.54 .827
Reputation of 1.71 .092 .714 .001 .242 1.88
contractors .983 .446 .451 .410 .812 2.28
Lenders poor .290 1.99 2.03 .079 1.91 .052
knowledge 8.85** 1.74 7.71* 1.02 2.00 4.75
Contractors know-how 10.16** 1.89 .135 .229 3.98* 6.39
Sources of finance info
Sources of advice info
The contingency tables show that in all groups of personal characteristics, the
majority of respondents consider all the contributing factors to be having an effect on
their chances of obtaining finance. Chi square results (shown in Table 4) indicate,
however, that no statistically significant difference existed between the personal
characteristics and the factors contributing to the financing constraints.
Table 4. Personal Characteristics: Reasons for the Financing Constraints: Chi

Square Test Results
Contributing factors Route to becoming a contractor Level of education Attendance of training
Delayed Pay ment + + +
Low profit on project .452 .317 1.45
Low capital base 1.91 3.52 1.08
Non-continuity of work 1.03 1.94 .831
Reputation of contractors .657 .004 1.15
Lenders poor knowledge .322 3.01 .204
Contractors know-how 1.91 .005 1.92
Sources of finance info 2.92 .513 1.85
Sources of advice info 5.79* 1.92 .470
Note: * significant at 5% level.
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Conclusion
SMEs serve as an effective instrument for employment creation and economic growth
and contribute to alleviating poverty. Unfortunately, access to adequate finance has
been a major challenge affecting their survival and growth. This study was set out to
investigate the financing constraints of small and medium scale construction firms in
Ghana and test whether there were links between the financing constraint and business
characteristic.
Generally, respondents were not denied access to finance. They were, however,
confronted with difficulties which might have resulted in their refusal of loan offers.
High collateral requirement was the severest problem. This was followed by interest
rate, period allowed for repayment of loans, insufficient funds and delays in services. All
the factors identified to be contributing to their financing constraints had a significant
effect, with delayed payment ranking first followed by low profit margins on pr ojects
and low capital base of contractors.
The type of project firms undertake was significantly related to the decision on
whether or not loan offers were accepted. Statistically significant difference existed
between financial class and constraints relating to the amount of funds offered. The
results indicate that statistically significant differences existed between the age of the
firms and constraints relating to interest rates, limit on funds provided and delayed
services. Consistent with other studies, firms that had not engaged financial advisers
were more likely than firms that had engage advisers to be confronted with constraints
relating to limit on funds offered. There was evidence to suggest that a statistically
significant difference existed between route to becoming a contractor and success in
loan application. Contractors with a construction profession background were more
43
likely than those with a construction trade background to be successful in their
application for loans. The latter were more likely than general entrepreneurs to be
successful in their application for loans.
In almost all groups of organisational characteristics, the majority of
construction firms were affected by the factors identified to be contributing to their
financing constraints. A statistically significant difference existed between financial
class and the effect of non-continuity of work, lack of information on sources of finance
and lack of information on sources of advice services on financing constraints. The
smaller firms (in terms of financial class) seem to be affected to a greater extent than
the larger firms. There was statistically significant difference between age of the firm
and the effect of delayed payment, low profit on project and non-continuity of work on
financing constraint. The results provide evidence to suggest that a statistically
significant difference existed between the type of project and the effect of delayed
payments and lack of information on sources of finance in obtaining finance. In all the
groups of personal characteristics, the majority of respondents consider all the
contributing factors to be having an effect on their chances of obtaining finance. The
result, however, shows that no statistically significant difference existed between the
personal characteristics and the factors contributing to the financing difficulties
The main conclusion is that the factors associated with the financing of small and
medium scale construction firms are multifaceted. A holistic approach is required to
address the situation. Perhaps it is about time the construction industry establishes its
own bank. This bank would appreciate and understand the peculiar nature and
procedures within the industry and thus innovative products and services to meet their
needs. The role of policy makers is to create the enabling environment and the
necessary regulatory support.

44
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SME Financing Constraints: Evidence from Survey of

Construction Firms in Ghana

socio-economic development is now well established. The important role played by

group of enterprises, which is affecting their development (e.g. Larcher, 1999;

type and intensity of factors that impede SME access to finance.

manufacturing, agriculture; service; mining/construction etc. Each industry has its

peculiar nature, procedures and structures, and therefore needs to be treated

Finally, we present the conclusions.

SME Financing Constraints

to secure funds to finance new commercial innovation. Subsequent studies have

2017). The phenomenon is generally referred to as ‘financing gap’.

SMEs surveyed had access to credit.

Factor Contributing to Financing Constraints

lenders require information relate to management, the market and finance.

Management information refers to assurances as to the competence, experience and

credibility of the management of the business concerned. Market information refers to

business information, collateral, networking, and managerial competences. External

macro-economy. Other studies associate the situation to lack of technical capacity of

banks servicing SMEs (Weidig, 2011).

Studies conducted in Ghana have revealed similar contributing factors (e.g.

market and exchange rate fluctuation.

expected to provide collateral as security, cash flow statement, audited f inancial

provide collateral and information such as audited financial statement made it

has been done to solve these challenges.

covering 13,685 companies across 38 sub-Saharan countries. They observed a strong

whereas the age of the firm had no significant impact.

manager in Gambia. Education helps to enhance the exploratory skills, improves

firms as the subjects for investigation.

There has always been a challenge in obtaining a comprehensive list of

construction firms operating in Ghana. Therefore, a multi-stage non-probability

agencies and consulting firms to be handed to contractor for completion.

In section A of the questionnaire, respondents were asked questions regarding

number of years in business, type of projects, use external advisors, number of

employees, route to becoming a contractor and training attendance. Section B requested

by subjects. It was tested, and adjustments made where necessary.

analysis. Frequencies, percentages and mean rankings of the constraints in raising

discussion. Cross tabulation was pursued to determine relationships between the

variables. Because of their bulkiness, contingencies tables are omitted in the

statistical significance difference between personal and organizational characteristics

and financial constraint and contributing factors. We adopt Aniekwu’s (1995)

interpretation in determining the relative importance of the variables. A mean of 1.4

Results and Discussion

construction firms. Specifically, the constraints to raising finance, the factors

representing 48 per cent response rate.

Constraints to Raising Finance

attached to loan offers.

Source: fi eld survey.

interest rate indicates it is a substantial constraint to contractors when they wish to

constraints when contractors wish to raise finance.

Figure 2. Constraints in Raising Finance

both building and road).

contractors and suggests that it cannot be ignored if programmes to support

ranking it first, and class 4 contractors, contractors with a construction trade

managerial and technical capabilities of contractors ranked relatively low (seventh),

contractors ranked it sixth, building contractors ranked it ninth, and contractors

with a mean of 3.69.

Figure 3. Reasons for Financial Constraints

Source: field survey.

extreme effect on this group of contractors. General entrepreneurs, class 3 contractors

factor, as shown in Figure 3, indicates that contractors perceive it to have a substantial

have a substantial effect on their chances of obtaining finance.

Finally, Figure 3 shows that poor knowledge of lenders on the construction

that would have to be considered if programmes were to be effective.

general entrepreneurs and contractors with a construction profession background