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Finance for Small and Medium-Sized Enterprises: A Report on the 2004 UK Survey of SME Finances included the exogenous variables, listed at note 1, as well as dummy variables for seeking finance in the last 3 years and for the business’s main bank. These latter variables are excluded from the models for finance relationships, in order to identify the relationships between the finances. 3. ‘p-value’ denotes the exact level of significance of the estimates. A value below 0.05 (0.10) indicates significance at the 5% (10%) level. s. Businesses which use er tial • . 69 These results show that: • There is a strong degree of substitutability between traditional bank debt finances (term loans and overdrafts). In particular, using a term loan reduces the likelihood of having an overdraft facility by almost 80 percentage points (holding firm characteristics constant). • Asset finance is a potential substitute for term loan asset finance are 25 percentage points less likely to use term loans, oth things being equal. • Asset-based finance, credit cards, equity finance and grants are also poten substitutes for term loans. Interestingly, term loans, asset finance and asset-based finance are strong substitutes for credit cards. Businesses would, most likely, get cheaper finance by replacing credit card borrowing with some other form of debt • There is no relationship between overdrafts and asset-based finance. This is surprising since asset-based finance is often viewed as a substitute for overdraft finance. • • 70 The remaining estimates are, in general, indicative of varying degrees of substitutability/competition between finances. However, firms with term loans are more likely to use grants (but not viceversa) suggesting, to some extent, these finances are complements. 71 Comment Overdrafts and term loans have the strongest degree of substitution, relative to other debt pr oducts. This finding supports the view that the market for traditional bank debt is distinct from the market for other debt products (Cruickshank, 2000). The results also indicate that less traditional forms of finance, such as asset and equity finances, could potentially be used instead of traditional debt finances. This suggests that competition from other debt products, and equity, could affect the demand for traditional bank debt. However, the final decisions about what finances to use will 69 T hese estimates for credit cards, in showing other forms of finance are substitutes, appears to highlight their function as a source of finance; in contrast, the role of credit cards as a payments mechanism would seem to be complementary to the use of other finances. 70 It may be, however, that businesses using asset based finance have lower outstanding overdrafts than otherwise similar businesses which do not use asset based finance. This would indicate that asset based fina nce is being used as an alternative to overdrafts, but not to the complete exclusion of having an overdraft. We leave the empirical testing of this conjecture to future research. 71 In fact, the results indicate that the chance of having a grant increases conditional on the firm having a loan (grant equation). In contrast, the chance of using a loan decreases conditional on the firm having a grant (term loan equation). The first result is unsurprising since the provision of grants is often conditional on the firm being able to match the amount of grant funding (perhaps, using loan finance). However, regarding the second result, given the firm has a grant it may have less need of a loan. 121
Finance for Small and Medium-Sized Enterprises: A Report on the 2004 UK Survey of SME Finances very much depend on individual firm and owner characteristics, and the nature of the project being funded. 72 72 We re-iterate that the estimates of financial relationships in Table 14.1 control for both observed and unobserved differences between firms. This, in effect, randomizes the use of finances allowing us to uncover the true relationships between the finances themselves. To take a concrete example, firms with more talented financial managers may be more likely to use both debt and equity in their finance portfolios, whereas less skill-endowed businesses may use neither. If we failed to take these inter-firm differences into account, our estimates would yield a spurious positive relationship between debt and equity finances (this pattern was observed, in practice, for results which did not use instrumental variables). These estimates would, however, only reflect the talent differences between firms and not the true relationships between the finances themselves. 122
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