Problem statement

Small Medium Enterprises (SME) is very crucial and important in the economic development
of developing countries like Malaysia. With entrepreneurship as mechanism is considered to
be an important and strong for economic development through employment, welfare effects,
reduce poverty and innovation (Syahida Abdullah, 2009; Raghda El Ebrashi, 2013; Lukman
Raimi, 2015) to reduce inequality and income disparity especially rural community in
Malaysia (Irwan Shah Zainal Abidin, 2016). The biggest enablers of entrepreneurship are
good finance access and support, accelerated government programs, strong internal market
dynamics, commercial services and physical infrastructure. Without those, start-up
entrepreneurs are lack with good opportunities.

SME lending has never been higher. The data presented by Mohd Razif Mohd Yunus (2015,
June 8) showed that SME financing grew 13.2% from RM199.6 billion at end 2013 to
RM225.9 billion in December 2014, involving 693,115 SME account. According to the data
provided, financing for the micro, small and medium enterprise sector stood at RM240.5
billion as at March 2015 that a 16.3% increase from a year earlier. The loans were disbursed
through commercial banks, development financial institutions (DFI) and government entities
and state backed agencies. Financing rejection rates have decreased gradually since 2011,
when 16.8% of the applications were turned down. The overall rejection rate for financial
institutions is falling and currently stands at 14.4% in 2015. Citing a survey undertaken by
SME Corp Malaysia annual report (2014), the report stated that 42% of the respondents
indicated that they were seeking new and additional external funding to grow their business.
While 94% of the overall respondents had been successful in getting financing, the remaining
others failed due to insufficient documentation (31.7%), high leverage or outstanding loans
(31.7%), or insufficient sales, income or cash flow (55.2%). The applications for financing
were rejected mostly because the financial institutions were doubtful that the SMEs could
service their repayments as the businesses had poor cash flow and negative financial
projections.

Attributing the shortcomings to a lack of financial literacy and proper administration. SMEs
barely have proper financial records and are not capable of maintaining a sound accounting
system. In some cases, the SMEs lack proper planning and struggle to budget their
operations. This makes the financing approval process more complicated. However,
enterprise development requires more than resources. Start-up entrepreneurs discover that
they need to attract money to initiate and commercialize their idea and enterprise model.
Thus they must find sources for the financial access. When dealing with most classic sources
of funding, start-up entrepreneurs often face numerous challenges and difficulties such as
scepticism towards the business and financial plans, requests for equity stakes, tight process
of application of financing ended up with unwillingness of the investor to invest a capital to
their enterprise due to questions; where these start-up entrepreneurs came from, what are their
education level as well as their financial status. Those question will make access of finance
has becoming a significantly constraint for the start-up entrepreneurs to start their enterprise.
Therefore, a new instrument of microfinance programme needs to be introduced to combat
this issue. To cope with these situations, SME enterprise must have an entrepreneurial
finance for their enterprise. There are internal and external channels in entrepreneurial
finance. For an example for internal channel for entrepreneurial finance is bootstrapping. On
other side, a bank, an angel investor, a venture capital fund, a public stock offering or crowd
funding are examples of external channel of entrepreneurial finance.

In achieving high-income economy in 2020, financial access for start-up entrepreneur should
be more robust, competitive, efficient, and effective. Access to financing has remained as
utmost problem for small and medium enterprises (SMEs). Despite various initiatives
spearheaded by the government and the private sector to address the gap in the market,
something cannot be changed that the MFIs will not grant a financing to an idea without
collateral. This is because there is a need for commitment from the potential entrepreneur.
Hence, this study investigates the role of benefits of financial bootstrapping toward SME
financial performance. By investigating the moderating effect of risk-taking propensity, this
study attempts to characterise the relationship between benefits of financial bootstrapping and
SME financial performance.