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Finance for Small and Medium-Sized Enterprises: A Report on the 2004 UK Survey of SME Finances 14. RELATIONSHIPS BETWEEN FINANCES We conclude the analysis in this report by looking at the relationships between the different forms of finance analyzed individually in previous sections. In particular, the aim here is to investigate: • The types of finance which are more likely to be used as alternatives to each other (substitute finances). These are finances which are in competition with each other, since a rise in the demand for one implies a fall in the demand for the other. • The types of finances which are more likely to be used in conjunction with each other (complementary finances). These finances are not in competition with each other since a rise in the demand for one also implies a rise in the demand for the other. To achieve this analysis models, relating the probability of using one source of finance to other sources (controlling for owner, business, regional and industry characteristics), are estimated. A positive relationship between finances is indicative that these finances are complements; a negative relationship suggests the finances are possible substitutes for one another. Cruickshank (2000) reports that only 29% of firms considered alternatives to their main source of finance (usually a term loan or overdraft). The alternative tended to be the other traditional bank debt product from the one chosen, rather than less traditional forms such as asset and asset-based finance. Even fewer firms considered equity finance as an alternative to their main source. Cruickshank took this as evidence that: the market for traditional bank debt is distinct from the market for other debt products; and that competition from other debt products, and equity, have only a limited restraint on traditional bank debt prices. Estimates of the relationships between finances, based on probit models relating the use of various finances, are reported in the following table. These estimates, by controlling for the influences of business and owner charact eristics on the use of finances, represent the underlying relationships between finances. 119
Finance for Small and Medium-Sized Enterprises: A Report on the 2004 UK Survey of SME Finances Table 14.1: The Relationships between Finances. Marginal Effects (× 100) of Different Sources of Finance (Independent variables) on the Likelihood of using other Finances (Dependent variables) (Population Weighted, Instrumental Variable, Probit 1 Estimation) (Estimates of Control Variables Not Reported ) DEPENDENT OVERDR P-VAL TERM P-VAL ASSET P-VAL ASSET P-VAL VARIABLE→ INDEPENDENT VARIABLES↓ AFTS OA S E BASED FINAN 2 - L N FINANC CE Overdraft -36 0.02 -42 0.00 0 0.94 Term Loan -76 0.0 0 -7 0.59 -1.1 0.12 Asset Finance Asset-based -22 0.35 -25 0.00 -0.2 0.62 Finance 2 0.94 -13 0.06 -19 0.00 Credit Cards -52 0.00 -76 0.00 -68 0.00 -18.2 0.03 Equity Finance -64 0.00 -14 0.01 -16 0.00 -0.4 0.00 Grant Finance -20 0.47 -16 0.00 -4 0.82 0 0.98 2 χ ( p-value) 0.00 0.00 0.00 0.00 Table 14.1 continued DEPENDENT CREDIT VARIABLE→ CARDS INDEPENDENT VARIABLES↓ 2 P- VAL 3 EQUITY FINANCE P-VAL GRANTS P-VAL Overdraft -23 0.32 -1.9 0.33 -4 0.20 Term Loan -77 0.00 3.5 0.48 25 0.07 Asset Fi nance -58 0.00 -0.1 0.07 4 0.39 Asset-based Finance -61 0.00 0 0.00 -2 0.00 Credit Cards -0.1 0.56 -12 0.11 Equity Finance 6 0.86 0 0.93 Grant Finance -58 0.00 0.1 0.72 2 χ (p-value) N 2,175 N 2,960,475 p 0.00 0.00 0.00 Notes: 1. The controls are for: firm size (employees, turnover and assets); legal status; dummy variables for majority-owned female and ethnic minority businesses; owner manager personal characteristics (age and experience); financial relationship variables (length of relationship with main provider, numbers of financial providers and products, rejection and discouragement dummies); industry dummies; and regional dummies. 2. The independent variables are instrumented due to the endogeneity of finances. In particular firms which use multiple finances are likely to have different (unobserved) characteristics from firms which use few finances. Failure to take these differences into account will result in correlation between the independent variables and the error terms in the models, causing the estimates of financial relationships to be biased and inconsistent. The finance variables are, accordingly, instrumented with their predicted probabilities. These probabilities were obtained from population weighted probit estimates which 120
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