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Are 'debt-shy' companies holding back the economy?

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.

cashpointOne 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.

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.

Dr Ross Brown, from the University of St Andrews, said, “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.”   

Neil LeeDr Neil Lee, of the London School of Economics, said, “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 Lee added, “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.”


For more information contact: ICAS Digital Editor Michael McGlinchey (mmcglinchey@icas.org.uk) or by phone + 44 (0) 7799 583 409/ +44 (0) 131 347 0126

Dr Neil Lee, Assistant Professor of Economic Geography, LSE (n.d.lee@lse.ac.uk|) or +44 (0)207 107 5477

About the research:

The research is based on a quantitative analysis of the Small Business Survey – a government survey of almost 9,000 firms – and a series of in-depth interviews with high growth entrepreneurs.  Further research is currently being undertaken by the researchers and ICAS to extend this study and this will be published in 2015.

About the authors: Dr Ross Brown is a lecturer in the School of Management and a member of the Centre for Responsible Banking and Finance at the University of  St Andrews and Dr Neil Lee is an Assistant Professor of Economic Geography at the London School of Economics and Political Science.

About ICAS: ICAS is a leading professional body for Chartered Accountants (CAs), with more than 20,000 members worldwide. ICAS is an educator, regulator and thought leader. ICAS members have all achieved the internationally recognised and respected CA qualification (Chartered Accountant). Almost two thirds of our working membership work in business with the others working in accountancy practices.

About SATER: The research project which culminated in this publication was funded by a grant from The Scottish Accountancy Trust for Education & Research (SATER), a registered Scottish charity.