Unlocking Formal Finance for Smes: Empirical Evidence from North Western Province, Sri Lanka

The study establishes a link between access to formal financing and the performance of owners of Small and medium-sized enterprises (SMEs) by highlighting how formal finance enables them to secure competitive capital for innovation, collaboration, and financial resilience. Thus, the research aims to examine the factors influencing access to formal finance among SMEs operating in the North-Western Province of Sri Lanka. Notwithstanding the significant role of SMEs in driving economic growth, many enterprises face barriers to accessing formal financial assistance due to various limitations. Using a quantitative research method, the research examines determinants such as managerial experience, financial knowledge, the presence of a well-developed business plan, and compliance with management regulations. 100 SMEs were surveyed using convenience sampling to collect data on these variables, and statistical tests, such as regression and factor analysis, were conducted to examine effects and relationships. The results show that managerial experience and financial literacy are positively associated with greater access to formal finance, and properly developed business plans and adherence to management regulations further increase access. Entrepreneurs' financial literacy needs to be enhanced through training in financial analysis, loan cost analysis, cash flow valuation, business planning, and financial reporting. Managerial skill development in finance, marketing, business planning, production, and human resource management is also needed to support more effective decision-making and operational efficiency. This research advances the literature on SMEs' challenges in securing formal financing and offers actionable recommendations for financial institutions and regulators to support this vital sector in Sri Lanka.