The FINANCIAL — New measures are needed to encourage high growth small and medium-sized entities (SMEs) to seek funding to expand, a report from the London School of Economics and Political Science and the University of St Andrews has found.
The study, published by The Institute of Chartered Accountants of Scotland (ICAS), identifies gaps in the UK funding framework for SMEs, but also highlights challenges in encouraging companies to sign up for debt and equity funding. For example, ‘debt-shy’ SMEs are reluctant to borrow funds to grow due to a lack of trust of banks and a resistance to yield control of their business to outsiders.
That is the major finding of the new research conducted by Dr Ross Brown of the University of St Andrews and Dr Neil Lee, Assistant Professor in Economic Geography at LSE.
One of the 14 published policies of the UK Department of Business, Innovation and Skills (BIS) is ‘Making it easier to set up and grow a business’. This new independent report provides crucial evidence for the debate on how this policy can be achieved.
The UK Government has introduced a range of policy initiatives, such as the new British Business Bank, to ease the flow of credit towards SMEs since the onset of the global financial crises. However, despite such policy initiatives, the levels of capital investment within the economy remain well below the pre-credit crunch levels within SMEs, according to LSE.
This research focuses on high growth SMEs, as these firms have the most potential to drive economic growth and employment. It investigates their demand for finance and whether they face problems in obtaining such finance.
The study, Funding issues confronting high growth SMEs in the UK finds that, although high growth SMEs are 9% more likely to apply for finance than other SMEs, they are no more or less likely to be successful. The other key findings on high growth SMEs are:
• They are highly ‘reluctant borrowers’ even to fund growth, due to a lack of trust of banks and a resistance to any dilution of their own autonomy.
• They tend to want access to bank finance rather than equity finance.
• These SMEs are more likely to use a ‘mixed cocktail’ of finance combining internal resources and debt.
The researchers make a number of recommendations, based on the research for both the supply and the often neglected demand-side of SME funding, including:
• The need to consider how ‘reluctant borrowers’ may be transformed into ‘willing borrowers’ for both debt and equity finance and how the demand for finance may be stimulated in the future.
• Future BIS surveys should address the nature of ‘reluctant borrowers’ and the complex array of factors which shape these disengaged or ‘debt-shy’ SMEs.
• Policy initiatives should be more targeted towards SMEs with growth potential and focus more on the supply of long-term finance and debt, rather than equity finance.
• There is a need to address certain systematic issues within UK banking, such as the lack of competition, which may impede access to finance for SMEs.
“This research dispels some deeply held misconceptions in relation to high growth SMEs. These firms are predominantly funded by bank debt, not equity sources of funding. While many use bank lending to fund capital expansion, some draw heavily on their internal resources to fund their growth,” said Dr Ross Brown, from the University of St Andrews.
“Policymakers need to carefully consider the way they target initiatives at particular types of firms. General measures to help all firms grow will be more expensive, and less successful, than efforts to improve access to finance for the minority of firms which have the potential to make a disproportionate impact on the national economy,” Dr Neil Lee, of the London School of Economics, said.
“At present, policy initiatives deployed by government focus on increasing the supply of funding within the economy. However, our research suggests that supply-side policy initiatives may fail to yield a satisfactory impact unless the ‘demand’ for external finance can be effectively stimulated. To date, initiatives to stimulate levels of demand have been largely absent,” Dr Lee added.
Discussion about this post