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
Table 3.1: Comparisons of Financial Products Used in the UK and US
US SSBF (1998) UK SMEF (2004)
Any loan 1
55% 65%
Personal Credit Card 45% 28%
Business Credit Card 33% 34%
Current Account 94% 97%
Deposit Account 22% 41%
Notes:
1. For the US, any loan denotes using any of the following: credit lines; mortgages; vehicle loans;
equipment loans; or capital leases. For the UK any loan denotes using any one of: overdrafts; term
loans; asset finance; or asset-based finance.
The patterns of usage of financial products are quite similar between the UK and US.
However, there is some evidence that use of personal credit
cards is lower, and use of
deposit
accounts is higher, in the UK.
3.1 Friends and family finance
This section concludes by examining the use of informal finance, from friends and
family members. Theory suggests that informal lenders may have private information
about the borrower, unavailable to banks, thereby overcoming information
asymmetries (Casson, 2003). Family members may
also be willing to offer loans, for
little
or no interest, in return for the option to ‘call in the favour’ at a later time (Basu
and Parker, 2001) er
27 . Also, as outlined in section 1, small business owners may pref
informal finance to minimize the involvement of strangers in the business. Existing
empirical evidence suggests that use of informal finance tends to be among less
profitable businesses with higher failure rates (Basu, 1998).
Table
A3.1.1 (Appendix to Section 3) examines the use of debt and equity obtained
from friends and family. These results indicate that:
nds and family.
sage (11%).
• There are no discernible differences, in the use of friends and family
finance, by: gender; ethnicity; business age; or growth rate. 28
• 6% of SMEs report using loans or equity finance from frie
• Small businesses (10-49 employees) report the highest u
• 7% of businesses, which have used formal external finance, also used
friends and family finance.
• 1% of businesses with no formal
external finance used friends and family
finance instead.
• This indicates that users of friends and family finance are more likely, than
not, to have other sources of funding.
27 Since entrepreneurship often ‘runs in the family’ it may well be the case that a family lender
becomes a family borrower at a later time.
28 The cell sizes are too small in these instances to be able to reach a robust conclusion.
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