Theory of finance gap

Question

Briefly explain the theory of finance gap.

Answer 1

Some entrepreneurs who have an idea for the new business or managers who desire to enlarge the existing business have complexity in gaining access to finance they require. A finance gap is situation where the business has profitable opportunities, however is unable to increase the funds to develop those (Jarvis, 2012). It was formally recognized in the year of 1931 by Macmillan Committee, which reported that the financing requires of small business were not well served by the financial services institutions at that time. The main argument supporting the notion of the finance gap is which the majority of enterprises in UK (and elsewhere) are small and medium-sized sole partnerships, proprietorships as well as private companies, which can’t increase equity finance by selling shares to public. This is since only public listed companies can increase capital on stock exchange. This characteristic of the finance gap is sometimes referred to as equity gap.