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Finance for Small and Medium-Sized Enterprises: A Report on the 2004 UK Survey of SME Finances Figure 4.1.1: Principal Source of Start-up Finance 6% 10% 6% 3% 8% 2% Personal Savings Bank Loan Friends and Family Loan None Home Equity Other Finance Don't Know Base: Bu sinesses aged less than 2 years N = 251,759 (Unweighted N = 147) p • For almost 2 in 3 entrepreneurs personal savings were the principal source of finance used to establish the business. • 1 in 10 relied mainly on a bank loan. • Less than 1 in 20 entrepreneurs relied mainly on equity released from their home. Amount of finance used at start-up The average amount of finance used at start-up is estimated at £71,000; the median amount is just over £15,000. Unfortunately the available sample ( N = 128) is too small to facilitate analysis of these amounts by different types of start-up. 65% 63
Finance for Small and Medium-Sized Enterprises: A Report on the 2004 UK Survey of SME Finances 5. REJECTION AND DISCOURAGEMENT In the previous section we looked at the demand for new finance as measured by businesses which sought funds in the last 3 years. In this section we analyze how many of these businesses were unsuccessful in obtaining funding (outright rejections) or received less than they wanted (partial rejections). Also, some businesses believe it is not worth their while applying in the first place because they expect to be turned down. These are so-called ‘discouraged’ borrowers (Kon and Storey, 2003) which also form part of the analysis in this section. ection 1, capital m n borrowers, ith viable business propositions, going unfunded. Both the business, and society as if these businesses were able to access funding. 34 As argued in S arket imperfectio s may result in some w a whole, could be better off This is the basis for assisted lending to firms which lack security or a track record (see e.g., Graham, 2004). Therefore, we look at the reasons for rejection, contrasting rejection due to insufficient security or track record with other reasons for rejection. This section continues by analyzing whether businesses denied bank loans or mortgages were able to access finance from alternative sources. In Section 2 we looked at levels of financial skills and confidence in dealing with finances. To reca p, we found that: a large majority of SMEs do not have their finances manage d by a qualified individual; and confidence in dealing with finances is not high compared to other aspects of running the business. We, therefore, conclude this section by looking at the impact of financial skills, confidence, and other business characteristics, on rejection. This will provide an initial indication of the role, if any, of financial skills in improving access to finance. To begin with, in Table A5.1 (Appendix to Section 5), we report the percentage of businesses, needin g new finance, which experienced rejection or discouragement in the last 3 years. Businesses ‘needing’ new finance include those which sought finance in the last 3 years (as defined in Section 4) and those which felt discouraged from applying. Table A5.1 shows that, among businesses needing new finance: • 11% were rejected outright (180,000 businesses) • 19% received less than they wanted ( 300,000 businesses) • 8% experienced discouragement (130,000 businesses). Further: • Businesses with greater assets tend to experience fewer rejections and less discouragement. This is, perhaps, unsurprising since these businesses have more collateral to offer lenders. • Sole traders are more likely to experience discouragement than partnerships (10% versus 2%). • Businesses in Northern Ireland have the lowest outright rejection rate (1%) but the second highest discouragement rate (14%). 34 The business would be able to proceed with its project, which could lead to the creation of new jobs down the line. 64
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