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Finance for Small and Medium-Sized Enterprises: A Report on the 2004 UK Survey of SME Finances
INTRODUCTION
Small and medium-size enterprises (SMEs), businesses with less than 250 employees,
account for 58% of private sector jobs and 52% of private-sector turnover (Source:
SME Statistics for the UK). 1 Between 1999 and 2003, employment in private sector
SMEs grew by 4.7%, set against a 4% fall in private sector large firm employment.
Further, numerous studies have identified enterprise as leading to higher rates of
productivity growth and innovation (Geroski and Pomroy, 1990; Cosh, Hughes and
Wood, 1999). The performance of this sector of the economy is therefore integral to
the overall performance of the UK economy.
A vital element for entrepreneurship to thrive is the availability of capital for start-ups
and growing businesses (HMT/SBS, 2002). However, due to imperfections in capital
markets, there have been persistent concerns about the ability of smaller firms to raise
sufficient external finance to meet their needs (Bolton, 1971; Wilson, 1979; Graham,
2004). These concerns have led to major government interventions, in both debt and
equity markets, such as the Small Firms Loan Guarantee Scheme (SFLG) and, more
recently, the Regional Venture Capital Funds (RVCF).
In the last few years, public concern has turned to the lack of competition in the
supply of banking services to SMEs (Cruickshank, 2000; Competition Commission,
2002). This has led to the introduction of several measures to increase competition,
for example, by easing switching between banks.
In January 2004, a consortium of public and private organizations, led by the Bank of
England, commissioned the University of Warwick to carry out an in-depth study of
SME finances in the UK. To this end, between August and October 2004, IFF
Research Ltd completed 2,500 telephone interviews with SMEs, in a wide range of
sectors 2 , across the whole of the UK asking about financial and other information.
This survey, the Survey of SME Finances (SMEF), is the first representative survey of
SMEs in the UK to offer a close analysis of businesses, their main owners and access
to external finance. In particular, the survey collected data relating to:
• Relationships between small businesses and their finance providers.
• The types of finance used (overdrafts; commercial loans; loans from
friends, family, and owners; asset finance; asset-based finance; credit
cards; and equity finance)
• Credit terms and conditions.
• Start-up finance.
• Rejection experiences.
1 www.sbs.gov.uk/content/analytical/statistics/smestats2003.xls.
2 Public sector organizations and charities were excluded, together with the Financial Services, Mining
and Quarrying, Electricity, Gas and Water Supply sectors. Also, the sample source, Dun and
Bradstreet, may lead to under-representation of very small and start-up businesses in the sample. With
these sample exclusions, the estimated SME population is 3.6 million versus a figure of 3.8 million
reported in the SME Statistics for the UK (2002).
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