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
Comment
• Start-ups are less likely to experience outright rejection than established
businesses (4% versus 12%).
• On the summary evidence, there are no significant differences in rejection
or discouragement
rates by gender, ethnicity or growth rate.
• Similarly, there is no evidence that switching banks, or using more than one
provider of financial services, increases the likelihood of rejection or
discouragement.
Cruickshank
(2000) identifies a rejection rate of 13% for all types of finance. Cosh
and Hughes (2003) find a rejection rate of 11%. Results in Wilson (2004) suggest
that
15% of company directors have received one or more rejections for funding from
a bank. Our results for rejections are within these bounds.
The finding that start-ups have lower rejection rates is surprising
(see e.g., Graham,
2004,
for contrary evidence). This is probably due to sample selection bias in that we
only observe successful start-ups
or, at least, those that went ahead with their plans.
In Section 6 we will analyze SMEs relationships
with financial providers, including
the number of providers used and the tendency to switch between providers.
In fact,
SM Es tend to use only one provider and switching rates are low. One
reason for this
is that an established relationship with a single provider may improve access to
finance. However, on the evidence in Table A5.1, businesses which use, and stick
with, a single provider are no less likely to experience rejection than other types of
business.
Regarding discouragement, Levenson and Willard (2000) estimate that
4.2% of the
US
small business population experienced discouragement. Our estimate,
as a
proportion of the UK SME population, is a similar 4% corresponding to 130,000
35
businesses.
Rejections and discouragement by type of finance
In the following table we look at rejection and discouragement rates for overdrafts,
term-loans and asset finance. Unfortunately, the numbers of rejections for asset-based
finance and equity finance are too small to be able to report meaningful results for
these types of finance. 36
35 Whereas the figure of 8% discouragement, reported in Table A5.1, is a percentage of the sub-group
of the population which sought new finance or were discouraged from seeking finance.
36 Venture capital is the only type of equity finance for which we attempted to collect rejection and
discouragement data.
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