Finance for Small and Medium-Sized Enterprises - DTI Home Page
Finance for Small and Medium-Sized Enterprises - DTI Home Page
Finance for Small and Medium-Sized Enterprises - DTI Home Page
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<strong>Finance</strong> <strong>for</strong> <strong>Small</strong> <strong>and</strong> <strong>Medium</strong>-<strong>Sized</strong> <strong>Enterprises</strong>: A Report on the 2004 UK Survey of SME <strong>Finance</strong>s<br />
the SFLG in the UK, are based on the rationale that good businesses may go unfunded<br />
due to a lack of security or track-record. 7<br />
The current state of SME finance markets<br />
In practical terms, it is questionable whether accessing debt finance remains a real<br />
concern <strong>for</strong> most businesses. A recent report by the Institute of Directors found that<br />
71% of businesses did not think it was difficult to access finance (Wilson, 2004). In<br />
another report only 1% of small firms reported access to, or the cost of, finance as<br />
their main problem (NatWest/SBRT, 2003). Looking ahead to section 2, SMEF also<br />
places financial problems far down the pecking order of business problems. In a<br />
similar vein, the <strong>Small</strong> Business Omnibus Surveys shows businesses, reporting access<br />
to finance as a barrier to growth, falling from 6% (Summer, 2001) to 1% (Autumn,<br />
2002) (SBS, 2001, 2002). Another study reports that, among businesses which did not<br />
seek new finance, 85% had no need <strong>for</strong> external finance because their internal<br />
cashflows were sufficient (Cosh <strong>and</strong> Hughes, 2003). This suggests that constraints on<br />
the supply of debt finance are not a major problem. This array of evidence sets a<br />
scene in contrast to the dark days following the recession in the early 1990s. At that<br />
time, a combination of poor communications <strong>and</strong> mistrust between lenders <strong>and</strong> small<br />
businesses led to widespread fears of a credit-crunch (Bank of Engl<strong>and</strong>, 1994).<br />
In part, the improvement in accessing finance over the last decade may be due to<br />
changes in methods of credit assessment which have improved the ability of lenders<br />
to determine the risk of prospective borrowers. 8 Notably these assessments rely less<br />
on bank manager’s judgments <strong>and</strong> more on quantitative evaluations of business-owner<br />
characteristics <strong>and</strong> recent cash flows. As a result, most loans below £30,000 are now<br />
allocated by credit scoring <strong>and</strong> do not depend on whether the applicant is able to post<br />
security (Graham, 2004).<br />
Nonetheless, the possibility remains that good businesses, without a track record or<br />
with nonst<strong>and</strong>ard characteristics, may find themselves with insufficient funds.<br />
Indeed, on larger loans, collateral remains a pre-requisite <strong>for</strong> obtaining funds. The<br />
UK government there<strong>for</strong>e continues to support small business lending, in particular<br />
<strong>for</strong> start-ups <strong>and</strong> high growth businesses, through the SFLG (Graham, 2004). Also,<br />
improving access to finance among ‘disadvantaged <strong>and</strong> under-represented’ groups,<br />
such as female <strong>and</strong> ethnic-minority businesses, is squarely on the current policy<br />
agenda.<br />
Assessing the evidence <strong>for</strong> market failure with SMEF data<br />
On the surface, looking at credit denial rates provides a direct indication of the extent<br />
of unsatisfied dem<strong>and</strong>. However, since both good <strong>and</strong> bad types of business may be<br />
denied credit, such a figure provides, at best, an upper bound on the extent to which<br />
good projects are going unfunded. 9 Indeed, it is arguable that experienced lenders are<br />
7 The problem of in<strong>for</strong>mation asymmetries will diminish if the business is able to demonstrate<br />
objectively its past per<strong>for</strong>mance thereby helping the lender to predict future per<strong>for</strong>mances.<br />
8 For the role of changes in the macroeconomic environment see Bank of Engl<strong>and</strong> (2004).<br />
9 This approach also ignores the contribution from groups of individuals who are discouraged from<br />
seeking finance because they anticipate rejection, making it not worth the ef<strong>for</strong>t to apply in the first<br />
place (Kon <strong>and</strong> Storey, 2003). In the presence of in<strong>for</strong>mation asymmetries it is good borrowers who<br />
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