Fewer than 1 in 8 small firms seek external finance. ERC research has highlighted the joint role of needs (broadly, cost and ambition) and perceptions about the availability of finance in decisions to seek external funding. What is preventing SMEs from investing and accessing external finance? Here we consider the role of and relationship between firm financing needs and business owner perceptions.

Using SME Finance Monitor data, this project looks at the varying extent to which a lack of needs and/or perceptions dissuade different types of firm from seeking external finance. We are particularly interested in firm which innovate and export. We will compare this analysiswith more traditional supply side concerns about the lack of finance available to these groups. We will also consider the extent to which demand and supply side financial constraints impact on firms’ growth plans.

CompletionNovember 2016
KeywordsFinance, growth, barriers, SME
ThemeFinance and Governance

Project Seminar – December  2016

The ERC held a project day on 13th December 2016 at the WBS offices in The Shard. The day was split into two sessions. During the afternoon we held initial stakeholder meetings for Projects 6-9. The event was attended by over 40 stakeholders, and generated interesting discussion and useful feedback to help inform the research.

Project 7 – Finance barriers to growth and productivity.

This project builds on previous research into discouraged borrowers (conducted in 2013-14 through ERC for the British Bankers’ Association (BBA) and the Department for Business, Innovation and Skills (BIS)) which highlighted the importance of perceptions of banking relationships and previous borrowing experiences in explaining entrepreneurs’ growth plans and future borrowing decisions (Fraser, 2014).

In particular, key insights were drawn from in-depth interviews with discouraged borrowers to identify the causes and consequences of discouragement.  Principal among these causes was a rejected credit application which was badly handled by the bank (e.g., due to poor communication about the reasons for rejection or a lack of follow-up advice about alternative finances).  Following a badly handled rejection, firms were therefore left not only with a shortfall of capital but were also left feeling uncertain about the future of the firm.

In this context, the central hypothesis developed in the current project is that previous borrowing experiences involving unmet capital needs, e.g., discouragement and rejection, result not only in financial constraints but also learning constraints on firm development.  In order for learning to take place the firm requires financial capital – insufficient capital may therefore constrain the development of the firm both in terms of its growth and the reduction of uncertainty (the latter phenomenon being associated with learning).  In particular, learning constraints may interact with and amplify the impacts of financial constraints leading to a cycle of financial and learning constraints.

To test this hypothesis various data sources (including the SME Finance Monitor and Longitudinal Small Business Survey) will be used to analyse the relationship between previous borrowing experiences and future growth plans and borrowing decisions.  This will include analysis for firms at different stages in their lifecycle and strategic firms (e.g., innovators and exporters) to control for differences in the demand and supply of finance.

Research Showcase. June 2017

The ERC held a Research Showcase on June 20th 2017 at RSA House in London.
The agenda of the day reflected the range of research we are currently undertaking at the Centre. The aim was to share our research insights and ideas with our key stakeholders, and to engage in dialogue with them about these. The showcase generated lively discussion and we are very grateful for the excellent engagement from our stakeholders, whose insights will shape and strengthen the final project outputs.

Project 7- One page summary 

We are always happy to receive feedback from stakeholders on our research. If you would like to submit a comment, or  you would like to be involved in future ERC research events, please email Dr Vicki Belt, Deputy Director – impact and Engagement.