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CHAPTER TWO: ANALYSIS OF ANNUAL SMALL BUSINESS SURVEY (SCOTLAND) DATA

2.1 This chapter presents the results of analysing the limited number of questions in the 2006 ASBS (Scotland) survey of 1014 firms that were concerned with accessing finance. As well as identifying the characteristics of the SMEs that sought finance, there were also questions in the survey relating to the type of difficulties the SMEs experienced and the amount of funding they were seeking.

2.2 Before presenting the findings of this analysis, it is important to recognise that the 2006 ASBS (Scotland) data are skewed towards particular sectors, notably manufacturing and hotels and restaurants when compared with the overall broad sectoral structure of businesses in Scotland (see Appendix I). This is likely to have had the effect of inflating the extent to which SMEs in Scotland have experienced problems in accessing finance in this study, given that manufacturing SMEs have a higher propensity to identify such problems than their counterparts in other sectors.

Extent of problems in accessing finance

2.3 Compared to the UK as a whole, a similar proportion of Scottish SMEs had sought external finance for their business in 2005-06 (29.2 per cent compared with 27.9 per cent), with slightly under one fifth (18.7 per cent) of the surveyed firms in Scotland having sought bank finance during the previous year. However, it is only a small minority of businesses that experienced problems in accessing finance. Just under a quarter (23.6 per cent) of SMEs in Scotland trying to access all types of finance reported problems compared to a fifth (20.3 per cent) in the UK as a whole. Moreover, 18.4 per cent of SMEs in Scotland seeking bank finance encountered problems (compared to 17.4 per cent in the UK as a whole). In other words, only 6.3 per cent of the 1014 businesses survey in Scotland reported problems in accessing finance and just over half of these, 3.4 per cent of the total surveyed, were businesses that had approached banks for finance.

2.4 The rest of this chapter is based on an analysis of the 64 Scottish SMEs within the 2006 ASBS (Scotland) survey that indicated they had experienced problems in accessing business finance. Of these, 34 reported difficulties in accessing bank finance.

Characteristics of SMEs seeking finance

2.5 The majority of firms seeking finance (84 per cent of them) stated that they will be growth orientated over the next 2-3 years, although it was a lower proportion of those seeking banking finance (77 per cent compared to 93 per cent seeking other types of finance). With regard to recent and near future growth performance, 64 per cent of the businesses indicated some form of growth, although for 17 per cent this was 'contained growth', with more than a quarter (27 per cent) of those seeking bank finance indicating this type of growth (Table 2.1). A slightly higher proportion of those seeking bank finance (38 per cent) indicated that they had not experienced any form of growth recently compared to those seeking other types of finance ( i.e. grants, equity investment and soft loans) (33 per cent).

Table 2.1 Recent and Future Growth of Business

Source: ASBS (Scotland) 2006

2.6 Significantly, almost half of the businesses experiencing difficulties in accessing external finance were either in manufacturing (27 per cent) or wholesaling/retailing (22 per cent). In terms of accessing bank finance, manufacturing, construction, retail and wholesale firms appear to have been most likely to have encountered difficulties.

2.7 In terms of owner-manager characteristics, only one of the business owners seeking finance was aged under 25, whilst just under a third (32 per cent) were aged between 25 and 44 and nearly two-thirds (64 per cent) aged between 45 and 64. More than a quarter (28 per cent) of businesses experiencing problems were majority women owned, with a significantly higher proportion (41 per cent) of those firms encountering problems accessing bank finance being majority women owned compared with those having problems with other finance sources (14 per cent). This significant finding is in line with previous research that has indicated that female 'would be' and existing entrepreneurs tend to have negative perceptions about their chances of success in applying for external funding, particularly from banks (Allinson et al , 2005, Carter et al, 2001; Fielden et al, 2003). The reasons for this are complex, but include issues such as inadequate personal assets, sexual stereotyping, lack of business track record, and perceived credibility problems with bankers.

Access to finance

2.8 As shown in Table 2.2, half of the 64 SMEs experiencing difficulties with obtaining business finance were unable to obtain any external finance from the first source that they approached, whereas just over one quarter (27 per cent) obtained some finance, and just under a quarter (23 per cent) obtained all the finance they required but encountered other problems such as delays in obtaining the finance. A slightly higher proportion of those whose preferred source was the banks did not obtain any finance than those who approached other sources (53 per cent compared with 47 per cent).

Table 2.2 Difficulties in Obtaining Finance

Source: ASBS (Scotland) 2006

2.9 Just over half (51 per cent) of those SMEs reporting difficulties indicated that they were eventually able to obtain the funding that they needed for their business, indicating that 28 per cent of them successfully obtained alternative finance to bridge the shortfall of funding received from the first source that they approached. This may indicate either their ability to raise funding from internal sources or that eventually the external funds proved sufficient for the purpose.

Problem types of finance

2.10 Just over half (53 per cent) of the SMEs indicating problems with accessing finance stated that this was with regard to accessing bank finance, with 36 per cent mentioning problems with bank loans and 17 per cent with bank overdrafts. This compares with 23 per cent identifying problems with obtaining grants and just three firms (5 per cent) mentioning equity investment issues.

2.11 Just 19 cases were able to provide reasons for the problems experienced and of these, the most commonly mentioned being that their funding had reached acceptable limits (9 cases); that they did not have a good credit history, either because they had not been trading long enough or because of a poor credit history (9 cases); that they were unable to provide sufficient security (8 cases); or that they were in the wrong business sector (8 cases).

Amount of finance sought

2.12 As shown in Table 2.3, a significant finding is that nearly three-quarters (74 per cent) of those experiencing problems with obtaining bank finance were seeking between £25,000 and £1 million compared to just over a third (36 per cent) of those experiencing difficulties obtaining other types of finance, the latter being more likely to be seeking smaller sums (44 per cent of them seeking less than £25,000). It is also notable that several SMEs who sought bank finance, but had problems with accessing it, perceived there to be an equity gap for firms seeking less than £1 million, due to the lack of interest on the part of equity investors and the cautious approach of banks.

Table 2.3 Amount of Finance by Type of Finance Required

Source: ASBS (Scotland) 2006

Problems with obtaining bank finance

2.13 The 2006 ASBS (Scotland) survey found that slightly under one fifth (18.7 per cent) of the surveyed 1014 firms had sought bank finance during the previous year. Table 2.4 demonstrates that less than one in five (17.9 per cent) of the firms actively seeking bank finance had experienced problems in obtaining bank finance, with one in seven receiving some or no bank finance and one in twelve (8.4 per cent) being unable to undertake their proposed project. The 16 firms seeking bank finance that were unable to proceed with their proposed business projects represents about half of the 33 Scottish SMEs reporting being unable to proceed with proposed projects due to their inability to access finance during this period. To put it into perspective, therefore, 1.6 per cent of the surveyed Scottish SMEs were unable to go ahead with projects during 2005-06 because of the problems of accessing bank finance.

Table 2.4 Scottish SMEs Seeking Bank Finance 2005/06

Source: 2006 ASBS

2.14 To summarise therefore, this analysis of the 2006 ASBS (Scotland) data indicates that:

• only a very small minority of SMEs that experienced problems in accessing finance in the twelve months prior to the survey, and in about half of these instances the problems related to bank finance.
• the firms experiencing problems accessing bank finance were more likely to be seeking larger sums of finance than those experiencing problems with other sources.
• a significantly high proportion of businesses experiencing problems accessing bank finance were women owned businesses.
• even amongst those SMEs that did experience problems accessing bank finance, very few of them were prevented from going ahead with their project as a result.

2.15 The next chapter makes a more detailed examination of those SMEs that did experience problems accessing bank finance.

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