Finance for Small and Medium-Sized Enterprises - DTI Home Page

Finance for Small and Medium-Sized Enterprises: A Report on the 2004 UK Survey of SME Finances
• SME banking is highly concentrated in a few banks - the largest four banks
account for 80% of the market for current accounts and overdrafts.
• And the propensity to switch banks is low - each year, 2.5% of SMEs switch
banks.
The reasons for the lack of switching are likely to be complex, involving factors
on
both the demand- and supply-sides. The data do not allow us to look at supply side
causes of inertia directly, although
we find that a large minority (29%) of businesses
would consider switching if approached
by another bank (the implication being that
rival
banks do not attempt to poach customers). On the demand-side, it is often
argued that businesses do not switch banks because it would harm their access to
finance, or because the process of switching is difficult. However, in this regard, the
survey finds that:
• Switching does not increase the chances
of rejection. • Nor does it increase the cost of borrowing.
• And most businesses, which have
switched, report that the process was
easy.
On the other hand, switching is influenced by firm characteristics. Notably:
• Businesses with qualified financial managers are more likely to switch than
those without.
• High growth businesses
are 3 times more likely to have switched than slow
growing businesses.
This suggests
that a lack of financial acumen and dynamism may be the true (demand-
side) causes of inertia, rather than the perceived
benefits of established banking relationships. The tendency
for most firms not to shop-around for alternative
financial
deals may pose few problems with low interest rates and available finance.
In a harsher environment, however, the capacity to search for the best, or any, deal
may be crucial. In this regard, financially skilled businesses, once again, have the
edge over their competitors.
On a more promising note for competition, there is evidence that new entrants,
offering distance banking, could attract market share among larger SMEs. These
businesses tend to use telephone or internet banking over visiting a local branch. Also
analysis of the relationships between finances shows that traditional bank debt faces
potential competition from asset- and equity finance.
In conclusion, the analysis in this report supports some previously held views on SME
finances, whilst also offering some new insights. However, this report is only the first
stage in analyzing the wealth of data which have been collected. In the future, it is
hoped that further analysis will facilitate deeper insights into SME finances.
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