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

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Finance for Small and Medium-Sized Enterprises: A Report on the 2004 UK Survey of SME Finances • The total value of grants awarded to SMEs in the last 3 years is estimated at £7.6 billion. • The total value of assistance to businesses, with less than 10 employees, is estimated at £6.3 billion, representing over 80% of the total awarded to all SMEs. The main sources of grant finance reported are: • Regional Grants (20%). • Enterprise Grants (12%). • Agricultural Grants (11%). • Business Support Scheme (7%) Section 14: Relationships between Finances We conclude the 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 since a rise in the demand for one also implies a rise in the demand for the other. To achieve this analysis, models are estimated relating the probability of using one source of finance to other sources (controlling for owner, business, regional and industry characteristics). 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 loans. Businesses which use asset finance are 25 percentage points less likely to use term loans, other things being equal. • Asset-based finance, credit cards, equity finance and grants are also potential 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, perhaps, surprising since asset-based finance is often viewed as a substitute for overdraft finance. • Businesses with term loans are more likely to have a grant than those without term loans, suggesting these finances are complements. 21
Finance for Small and Medium-Sized Enterprises: A Report on the 2004 UK Survey of SME Finances These results imply that most finances are in potential competition with each other: most notably, term loans, overdrafts and asset finance. The exception to this finding is the relationship between grants and term loans. Specifically, businesses are more likely to have a grant, given they have term loan. This result is unsurprising, since many grants are awarded conditionally on the business matching the grant funding with other sources of finance. Conclusions The report concludes by drawing together the various themes which emerge from the analysis. In particular, the general availability of finance is contrasted with specific issues for access to, and the cost of, finance for ethnic minority and female-owned businesses respectively. Further research is planned to enable firmer conclusions, for ethnic minority businesses, to be reached. The low incidence of financially qualified management in SMEs is highlighted as another possible obstacle to obtaining finance. In the context of competition, the relationship between firm characteristics and bank switching is noted. Specifically, businesses with financially qualified management, and high growth businesses, are more likely to switch banks. This suggests that, on the demand-side, a lack of financial acumen, or absence of dynamism, may contribute to the high level of inertia observed in SME banking relationships. There is no evidence that switching banks is either difficult, hinders access to finance, or raises the cost of borrowing. 22
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