URN 07/1315

Literature Review for the Small Business Service

The Impact of Perceived Access to Finance Difficulties

on the Demand for External Finance

Final Report
January 2007

Centre for Enterprise and Economic Development Research

Middlesex University
The Burroughs
London NW4 4BT

Research Team

Dr Peter Wyer, CEEDR

Dr Ignatius Ekanem, CEEDR
Professor David North, CEEDR
Professor David Deakins, University of Paisley
CONTENTS

EXECUTIVE SUMMARY...................................................................................4

1. INTRODUCTION...........................................................................................9
1.1 Aims.....................................................................................................................................................9

1.2 Approach ........................................................................................................................................10

1.3 Structure of the report.....................................................................................................................10

2. THEORETICAL PERSPECTIVES................................................................................................10

2.1 A Systems Perspective ..................................................................................................................11

2.2 Social Network Theory....................................................................................................................12

2.3 The Pecking Order Hypothesis ......................................................................................................12

2.4 Theories of Financial Intermediation ............................................................................................13

2.5 Personal Construct Theory ............................................................................................................13

3. THE MEANING OF ‘PERCEPTIONS’ FOR THE PURPOSE OF THIS

STUDY ..........................................................................................................13

4. LOCATING THE PROBLEM OF ‘PERCEIVED DIFFICULTIES IN

ACCESSING FINANCE’ ..............................................................................14
4.1 Disadvantaged areas and deprived communities........................................................................15

4.2 Female would-be and existing entrepreneurs ...........................................................................19

4.3 Influence of age on attitudes to finance..........................................................................................21

5. THE SOCIAL EMBEDDEDNESS OF THE ENTREPRENEUR..................22

5.1 Social Networking............................................................................................................................22

6. ENTREPRENEUR PERCEPTION AND AWARENESS WITH REGARD TO

ALTERNATIVE METHODS OF RAISING EXTERNAL FINANCING.............23
6.1 Studies covering a range of sources................................................................................................24

6.2 Banks.................................................................................................................................................26

6.3 Bootstrapping...................................................................................................................................30
6.4 Equity ..............................................................................................................................................31

6.5 Grant sources ..................................................................................................................................32

7. THE LENDER-BORROWER RELATIONSHIP...........................................33

7.1 Supply-side impacts on borrower perceptions, attitudes and actions ........................................34

8. MANAGEMENT ABILITIES AND ACCESS TO EXTERNAL FINANCE:

PERCEPTIONS AND REALITY ....................................................................38
8.1 Entrepreneur perceptions relating to ability.................................................................................38

8.2 Evidence of inadequate financial management ability.................................................................39

8.3 Potential impact of background and educational achievement...................................................40

9. WHERE ARE THE GAPS IN THE CURRENT KNOWLEDGE BASE AND

WHAT RESEARCH IS NEEDED?..................................................................41

3
EXECUTIVE SUMMARY

1. Introduction

 The purpose of this review is to investigate the extent to which perceived

difficulties concerning access to finance discourage potential and existing
entrepreneurs from demanding external finance. It focuses on evidence
relating to the barriers to accessing finance that can arise because of the
perceptions that ‘would-be’ and existing entrepreneurs have regarding their
chances of success in applying for external finance, the process involved in
obtaining it, and the various ‘costs’ to them and their business of being
successful.

 The review has had the following aims: (i) to provide a comprehensive
overview of the existing research literature and understanding of the status
quo relating to the perceived difficulties of accessing finance; (ii) to identify
key policy relevant issues; and (iii) to outline future research and policy
agendas.

 The review encompassed theoretical writings on the subject, empirical work

including quantitative survey methods as well as qualitative research based
on case studies, and various data sources/sets which are likely to repay
further analysis. As well as drawing upon relevant research evidence from
the UK, the review has also used literature relating to a number of developed
economies, notably the USA, Canada, Scandinavia, and other European
Union countries.

2. Theoretical Perspectives

 The assumptions of much traditional financing theory do not address many of

the constraints and difficulties faced by ‘would-be’ entrepreneurs and small
business owner managers in accessing finance. Several other theoretical
perspectives are considered to be more helpful in this respect, drawing upon
concepts in other disciplines such as organisational behaviour and social
psychology.

 Five interrelated perspectives are reviewed:

(i) a ‘systems perspective’ which demonstrates the need to look at

financial issues within the broader internal and external operating
contexts;
(ii) ‘social network theory’ which draws attention to the importance of
the entrepreneur’s social relations and networks;
(iii) the ‘pecking order hypothesis’ relating to entrepreneurs’ perceptions
of alternative financial sources;
(iv) theories of ‘financial intermediation’ that contribute to
understanding the nature of lender-borrower relationships;
(v) ‘personal construct theory’ which focuses on entrepreneurs’
perceptions of different aspects of the world in which they operate
and how their experience of them shapes their changing
perceptions.

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3. The Meaning of ‘Perceptions’

 Perception is defined here as an interpretation or impression based on the

‘would-be’ or existing entrepreneurs understanding of something. With
regards to entrepreneurs’ perceptions of difficulties in accessing finance, it is
important to recognise that an individual may adjust their personal constructs
and thus their perceptions, beliefs and expectations in the face of new
experiences.

4. Locating the Problem

 Although the question of how ‘would-be’ and existing entrepreneurs perceive

the process of accessing finance is rarely tackled directly in the numerous
recent studies of enterprise and entrepreneurship in deprived areas and
communities, they do provide some useful insights into the nature of the
anticipated and actual difficulties experienced.

 The evidence indicates various cultural influences on the perception of Black

& Minority Ethnic Business (BMEB) entrepreneurs, there being a commonly
held expectation amongst certain ethnic groups that they will be treated
adversely, particularly by commercial banks.

 A number of studies indicate that entrepreneurs living in deprived areas

perceive themselves to be disadvantaged in obtaining bank finance because
of a lack of collateral, arising from low property values or a dependence on
rented living accommodation, and lack of personal savings.

 Women ‘would-be’ and existing entrepreneurs are another group where

issues of perception with regard to accessing finance appear to be particularly
important and here there are recent and current studies that provide
particularly helpful insights.

 The issue of low confidence levels amongst female ‘would-be’ and existing
entrepreneurs surfaces in several studies, leading to negative perceptions
about their chances of success in applying for external funding.

 Some evidence suggests that women’s perceptions are influenced by the

type of business many of them are running (i.e. low tech service businesses)
and the fact that they do not fit normal entrepreneurial stereotypes (i.e. they
favour part-time, flexible working). For these reasons they may be reluctant
to enter into long-term financial commitments.

 Recent evidence indicates that younger ‘would-be’ entrepreneurs are

reluctant to take on more debts until they have cleared their student loans,
with concerns about the implications of the rising cost of higher education for
the supply of graduate entrepreneurs.

5. The Social Embeddedness of the Entrepreneur

 The extent to which ‘would-be’ and existing entrepreneurs are ‘socially

embedded’ is a key influence upon their perception of the ease with which
they can access different sources of finance.

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 Numerous authors have emphasised the importance of social networking to
learning about how to run a successful business, including overcoming
barriers to financing.

 Much of the evidence indicates that many entrepreneurs fail to fully exploit the
advantages of networking, that a suspicion of external agencies was one of
the barriers that needed to be overcome, and that women entrepreneurs in
particular are less likely than their male counterparts to engage in business
networks.

6. Entrepreneur Perception and Awareness with regard to Alternative

Methods of raising External Finance

 It is difficult to obtain a coherent picture of entrepreneurs’ perceptions of

alternative methods of raising external finance as the existing literature covers
a range of different national and regional contexts as well as reflecting
different research methodologies.

 Various large-scale surveys tend to confirm ‘the pecking order hypothesis’ in

showing that at pre-start and start-up, entrepreneurs have a strong
preference for using personal and informal sources of finance and that the
use of external debt finance (particularly bank overdrafts) becomes more
common once the business is up and running.

 There is broad agreement in the literature that it is the perception of ‘would-

be’ entrepreneurs that they will be unable to provide the necessary security
which is the main reason for not applying for bank finance.

 Negative perceptions of bank finance are most evident amongst potential

entrepreneurs from lower socio-economic groups, whilst dissatisfaction with
bank finance is greatest amongst those running the youngest and smallest
enterprises and also amongst the youngest entrepreneurs.

 Equity finance tends to be the least preferred source (although not in the case
of high-tech start-ups), concerns over the lack of managerial control being
cited in most studies as the perceived disincentive.

 A number of studies draw attention to the increasing preference of

entrepreneurs at all stages of enterprise development for various
‘bootstrapping’ methods of financing, one of the most commonly used being
personal and business credit cards. The ease of accessing un-secured
capital and flexibility are perceived as the main advantages over other
external sources of finance.

7. The Lender-Borrower Relationship

 There are relatively few studies that address this issue head on but it is
possible to glean some insights from studies that are concerned with other
aspects of the lender-borrower relationship.

6
 EU evidence indicates that UK SMEs not only find it easier to access finance
than do their counterparts in many other European countries, but also that
this has improved in recent years, more so than in most other countries.

 There are a number of UK based studies which indicate that the centralisation
of banking decisions has increased ‘the psychological distance’ between the
bank and small business borrowers, the negative perception effects being
greatest in the case of young firms. The rationalisation of banking provision is
seen by some authors as compounding problems of information asymmetry
for small businesses.

 There is recent evidence to show that business lending officers, despite

undergoing similar training on the application of decision criteria, tend in
practice to place greater emphasis upon the personal characteristics of the
entrepreneur, resulting in concerns about a lack of even handedness and its
adverse impact on the perceptions of entrepreneurs.

 More positive perceptions of banks by small business owners tend to be

underpinned by more participative relationships and research has shown the
crucial role that accountants can play here, as trusted actors by both the
banks and entrepreneurs.

8. Management Abilities and Access to External Finance

 There is agreement in the literature that many entrepreneurs are put at a

disadvantage in accessing external finance as a result of their low levels of
confidence and perceived ability in dealing with financial issues.

 A number of studies have highlighted low levels of financial literacy, which

appear to be most commonly found amongst women entrepreneurs, those
from various ethnic minority groups, and those with lower levels of
educational attainment. Other studies have found low levels of financial
literacy (compared to their scientific and technological skills) amongst the
founders of high-tech businesses.

 There is quantitative evidence based on a large scale survey of existing

SMEs to show the difference that having someone with financial qualifications
adds to the chances of success in accessing finance.

 The motives for starting a business have also been found to make a
difference, with those with high expectations (i.e. the more ambitious
entrepreneurs) having greater confidence in approaching external financial
sources than those with low expectations (i.e. reluctant entrepreneurs).

9. Where are the Gaps in the Current Knowledge Base and What Research
is Needed?

 The existing evidence base portrays a partial and fragmented understanding

of perceived difficulties relating to accessing external finance by ‘would-be’
and existing entrepreneurs.

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 The review has not identified sufficient reliable evidence to enable us to
assess with any real confidence the scale and extent of the problem,
particularly amongst pre-start and start-up enterprises.

 There are a number of areas that would benefit from more research, these
being:

(i) Female entrepreneurs – there is a need for more rigorous survey

evidence to confirm emerging insights as to why finance remains a
problem for many ‘would-be’ and existing women entrepreneurs as
well as for more detailed qualitative research that accommodates
both the demand and supply perspectives. This also needs to
relate to the issues of motives and business type.

(ii) Disadvantaged areas and communities – there is a need for more

research to gauge the extent to which potential entrepreneurs from
these areas/communities are unable to exploit funding
opportunities because their perceptions are well-founded (i.e.
based on an accurate assessment of their prospects) or ill-
founded (i.e. based on misunderstandings or misinformation).

(iii) Bootstrapping – more detailed research is required into various

informal methods, including the growing use of credit cards, to
finance business start-up and what ‘would-be’ entrepreneurs
perceive as the benefits of this type of finance compared to more
traditional forms.

(iv) The Emergence of New Business Models – a significant issue is

the implications of the changing nature of what constitutes much
new and emerging small business activity, such as the growth of
internet and knowledge based businesses, for external funding
provision. A deeper understanding is required of these ‘new’
entrepreneurs, their financial needs, and their perceptions of the
appropriateness of existing funding sources.

(v) Use of External Assistance – further research is needed into the

relationship between external support provision and access to
finance, including more understanding of the reasons why ‘would-
be’ and existing entrepreneurs avoid, or are reluctant to utilise,
support that would develop their financial awareness capability.
Further understanding is also required of the potential of more
participative banking relationships in addressing issues of
information asymmetry.

8
1. INTRODUCTION

The purpose of this review is to investigate the extent to which perceived difficulties
concerning access to finance discourage potential and existing entrepreneurs from
demanding external finance. It focuses on evidence relating to the barriers to
accessing finance that can arise because of the perceptions that ‘would-be’ and
existing entrepreneurs have regarding their chances of success in applying for
external finance, the process involved in obtaining it, and the various ‘costs’ to them
and their business of being successful. As such, the focus of the review is on
evidence relating to those entrepreneurs and business owners who have perceptions
and attitudes that prevent them from applying for external finance.

1.1 Aims

The purpose of this review for the Small Business Service (SBS), in conjunction with
the Small Business Investment Taskforce (SBIT), is to investigate the extent to which
perceived difficulties concerning access to finance discourage potential and existing
entrepreneurs from demanding external finance. It focuses on evidence relating to
the barriers to accessing finance that can arise because of the perceptions that
‘would-be’ and existing entrepreneurs have regarding their chances of success in
applying for external finance, the process involved in obtaining it, and the various
‘costs’ to them and their business of being successful. As such, the focus of the
review is on evidence relating to those entrepreneurs and business owners who have
perceptions and attitudes that prevent them from applying for external finance.

More specifically, the review has had the following aims: (i) to provide a
comprehensive overview of the existing research literature and understanding of the
status quo relating to the perceived difficulties of accessing finance; (ii) to identify key
policy relevant issues; and (iii) to outline future research and policy agendas. One of
the requirements has been to steer the review as far as possible towards pre-start
and start-up enterprises rather than established businesses.

9
1.2 Approach

The approach to this review has involved an initial scoping exercise to clarify the
specific issues to be addressed and criteria for selecting the literature base.
Relevant literature (government/policy related as well as academic) has been
identified through scanning relevant journals, web sites of research
organisations and government departments, and conducting key word searches
of electronic databases using relevant search engines. The search
encompassed theoretical writings on the subject, empirical work including
quantitative survey methods as well as qualitative research based on case
studies, and various data sources/sets which are likely to repay further analysis.
The review process has been informed by the use of a guiding structure which
identified the key themes and questions to be addressed by the review. As well
as drawing upon relevant research evidence from the UK, the review has also
used literature relating to a number of developed economies, notably the USA,
Canada, Scandinavia, and other European Union countries.

1.3 Structure of the report

The report follows the key themes identified in the guiding structure. The following
section, section 2, outlines a number of relevant theoretical perspectives which
are considered to be useful in interpreting the findings of the subsequent
empirical studies. Section 3 considers the meaning of ‘perception’ that is
appropriate to the review. Section 4 is concerned with evidence which helps
answer the question of where the problem of perceived difficulties in
accessing finance is most often found and focuses particularly on deprived
areas and communities, and female entrepreneurs. Section 5 looks at
evidence relating to the way in which the social embeddedness of
entrepreneurs, especially their participation in social networking, can
influence their attitudes towards accessing finance. Section 6 is concerned
with entrepreneurial perceptions of different sources of external finance,
including bank finance, a range of bootstrapping methods, and equity finance.
Section 7 focuses on the lender-borrower relationship and considers the ways
in which the policies and actions of providers have affected the perceptions of
entrepreneurs. Section 8 is then concerned with considering other literature
relating to the way in which the abilities and motives of entrepreneurs may
affect their perceptions and attitudes towards external finance. Having
reviewed the existing evidence covered by this review, the final section of the
report assesses the current state of knowledge regarding perceived
difficulties to accessing finance and identifies a number of knowledge gaps
that require further systematic research investigation.

2. THEORETICAL PERSPECTIVES

The analysis of existing literature relevant to understanding the ‘impact of perceived

access to finance difficulties on the demand for external finance’ is based upon a
recognition that the assumptions of much traditional financing theory does not
address many of the constraints faced by ‘would-be’ and existing entrepreneurs. This
opening section is therefore concerned with outlining several other theoretical
perspectives that are considered helpful in this respect, drawing as they do upon
concepts in other disciplines such as organisational behaviour and social
psychology. Five interrelated perspectives will be introduced: a ‘systems

10
perspective’ which demonstrates the need to look at financial issues within the
broader internal and external operating contexts; ‘social network theory’ which draws
attention to the importance of the entrepreneur’s social relations and networks; the
‘pecking order hypothesis’ relating to entrepreneurs’ perceptions of alternative
financial sources; theories of ‘financial intermediation’ that contribute to
understanding the nature of lender-borrower relationships; and finally ‘personal
construct theory’ which focuses on entrepreneurs’ perceptions of different aspects of
the world in which they operate and how their experience of them shapes their
changing perceptions.

The theoretical perspectives are used as frames of reference to (a) guide the
literature research in an academic area which to date is not well researched and
documented; and (b) to aid interpretation of findings and research methodology in
the studies identified. Although relatively few empirical studies make explicit
reference to any of these theoretical perspectives, we will aim to show in later
sections where empirical findings are consistent with a particular line of thinking and
interpretation.

2.1 A Systems Perspective

Despite a growing literature in the area of new venture creation, few studies have
examined the venture creation process and even fewer studies have considered the
influence of the context of the process (Liao and Welsch, 2003). A systems
perspective to understanding the start-up and development of business organisations
directs the researcher beyond the restrictions associated with focusing solely upon
small business finance-related literature. Possibilities emerge for unfolding an
understanding of entrepreneurial intentions, perceptions and actions embedded
within wider organisation sub-systems and disciplines of investigation. Positing the
small business as an open system highlights how, in order to survive, the
entrepreneur must manage and coordinate the functional activities that make up its
internal context and interface and build relationships with the various aspects of
his/her unpredictable external operating context. For instance, of particular
significance to this study are the ways in which external actors such as suppliers,
potential customers or business advisors may influence a start-up entrepreneur’s
perceptions, attitudes and behaviours. In particular, the systems perspective draws
attention to the likelihood that an understanding of entrepreneur and small business
financing is being progressively built up within the literature through ‘lenses’ other
than of a pure ‘accounting’ perspective (Bianchi 2002).

Positioning of the entrepreneur/’would be’ entrepreneur as a pivotal actor in a

dynamic and interconnected internal and external operating context draws attention
to the complexity of the small business development task in effectively managing that
context. Moreover, it leaves behind the over simplified conceptualisation of a ‘small
business sector’ and in its place considers the likelihood of unique individual
entrepreneurs, operating in a unique problem and opportunity development context in
pursuit of diverse development goals. Thus, those areas of traditional finance theory
that couch small business financing decisions in terms of wealth maximisation
significantly over-simplify and filter out many key factors that can affect the
entrepreneur’s financing decisions (Van Auken 2005). An individual entrepreneur is
motivated to seek value across a wide spectrum which could include: economic
(increasing personal wealth), social (the well being of others) and environmental
(conservation of the environment) motives – (Cohen, Smith and Mitchell 2004). It
follows, therefore, that the perspectives, preferences and perceptions of many would-

11
be and existing entrepreneurs are likely to be embedded in motives for firm
foundation and development that transcend the assumption of profit or wealth
maximisation (for example, motives may influence attitudes and behaviour with
regard to external finance: it may, for instance, partly explain why many women start-
ups prefer to maintain a part-time mode of business operation rather than tie in to
external finance; or why some life style businesses shy away from utilisation of
external funding).

2.2 Social Network Theory

A key approach to understanding entrepreneur interconnectedness with the external

development context is that of social embeddedness. Entrepreneurship research has
revealed how a nascent entrepreneur’s social network is a major contributory factor
to the start-up and development processes of a new venture. Moreover, evidence
suggests that women are more adept at building informal networks and that a
woman’s social network and level of entrepreneurial self-efficacy positively influences
new venture intentions and start-up success (Sequeira 2005). Social network theory
directs attention to how the social embeddeness of the entrepreneur may affect
access to and acquisition of external finance as well as the cost of capital incurred.
Social relations and networks can benefit small firms seeking finance and influence
which firms obtain capital and at what cost (Uzzi 1999). For Carter et al (2006
forthcoming), “social network theory can provide insight into the complexities and
subtleties surrounding access and availability of bank finance and the relationships
shared between banks and business owners”. Moreover, whilst the successful
development of more progressive ‘would-be’ and existing entrepreneurs may be the
result of positive learning through networking interfaces, including the challenging of
existing personal beliefs or perceptions, for others a low level willingness or ability to
network and learn from others may be a key reason why existing attitudes and beliefs
perpetuate.

2.3 The Pecking Order Hypothesis

With regard to ‘would be’ and existing entrepreneurs’ perception of, and attitude
towards, use of alternative finance sources, Myers (1984) ‘pecking order’ model has
recently received support in the study of small business financial preferences, though
originally designed for large quoted companies. The hypothesis suggests that small
business owner managers’ attitude towards and use of financial sources are ranked:
(i) internally generated equity; (ii) debt financing; and (iii) external equity from new
owners (Serhiem and Isaken 2004). Some studies, whilst producing apparent
contradictions to the ‘pecking order hypothesis’ have been consistent with the spirit of
the model in that small firms prefer sources of finance associated with the least
information asymmetry (Hogan and Hutson 2005). The hypothesis offers a frame of
reference for consideration of literature based evidence on small business founders’
perception of information asymmetries in debt and equity markets as well as
perception as to whether tax benefits of debt exist and attitudes to levels of business
risk. It also provides a context for consideration of entrepreneurial awareness of, and
orientation toward, non-traditional sources of finance such as bootstrap finance and
whether this is used exclusively due to lack of capital or as a deliberate choice
(Winborg 2005). The emerging ‘theory of the discouraged borrowers’ (Kon and
Storey, 2003) highlights how some existing small businesses believe they will not be
successful in obtaining traditional external finance and would therefore not apply. For
example, according to this theory, application rates will depend in part on the firm’s
perception of the bank’s screening accuracy. Some BMEB start-ups have been found
to be adopting the same ‘discouraged borrower’ attitude and utilising bootstrap

12
finance based on the perception that, given certain personal characteristics or lack of
track record, it would be futile seeking out external finance (CEEDR 2005).

2.4 Theories of Financial Intermediation

Further guiding lenses with regard to the issue of asymmetric information are derived
from use of a principal-agent framework with regard to bank problems of adverse
selection and moral hazard (Jensen and Meckling 1976); and in the theories of
financial intermediation which propound that relationships between banks and
‘would-be’ and existing entrepreneurs generate valuable private information about
likelihood of the financial success of the bank’s customer (Cole, 1998) and potentially
influence the perceptions and attitudes of the customer toward the bank. Such a
hypothesis suggests that relationship-lending, through closeness of a lender to a
borrowing entrepreneur, can facilitate ‘soft’ information via informal contacts and
potentially overcome the impacts of asymmetric information with the entrepreneur
which conditions of non-relationship lending would not facilitate (Watanabe 2005). It
also draws attention to the extent to which close and ‘distant’ bank-lender
relationships affect the conditions of borrowing such as price of the loan, collateral
levels demanded (Steijvers et al 2005), the extent to which collateral requirements
influence an entrepreneur’s ability to raise finance (Hamilton, et al 2002) and how
prior customer experience with the lending institution continues to colour perceptions.
The issue is also raised of the extent to which the concept of a close lender-borrower
relationship extends to ‘would-be’ entrepreneurs who have previously maintained a
non-business account-holding relationship with the bank and the extent to which this
influences perceptions in the context of subsequent business start-up.

2.5 Personal Construct Theory

Finally, integral to the systems perspective in which this literature review sits is the
issue of ‘would-be’ and existing entrepreneurs learning activities and abilities, and
their willingness and ability to challenge existing personal beliefs and perceptions.
Personal Construct Theory (PCT) (Kelly 1955) provides a frame of reference as to
how individual entrepreneurs actively try to make sense of their environment by
constructing their own theories or personal beliefs of their small business and its
operating world, these being constantly built up, tested and adjusted in the light of
new experiences. Such theory goes a considerable way to explaining the nature of
an entrepreneur’s perceptions and the way he or she acts. For example, an
entrepreneur can personally represent their firm and its environment, but later learn
about the personal constructions of others and proceed to place an alternative
construction on their own original representation. Drawing upon PCT, we recognise
that an entrepreneur may misrepresent a real phenomenon, such as a barrier to
accessing finance, and yet his/her representation will itself be entirely real – what
they perceive may not exist, but their perception of it does (Kelly 1955). The
particular value of the PCT perspective is its directing of the literature review search
and analysis with regard to the identification of research studies which explore why
lenders and small business owners act as they do, and which seek “to uncover
taken-for-granted cognitive image rules that shape the relationships they share…and
utilise new methods and theoretical perspectives with the ability to penetrate such
perceptions” (Carter, Shaw and Wilson 2003).

3. THE MEANING OF ‘PERCEPTIONS’ FOR THE PURPOSE OF THIS STUDY

13
For the purpose of this investigation ‘perception’ is considered to be an interpretation
or impression based on ones understanding of something. It is a condition of being
aware: a level of awareness. It exists in the mind of an individual as the product of
careful mental activity, possibly held as an idea, image, notion or thought (Pearsall
and Trumble 1995).

Guided by the key premises of Personal Construct Theory (Kelly 1955), it is

appropriate when attempting to identify and assess evidence of ‘would-be’ and
existing entrepreneurs’ perceptions of difficulties relating to the accessing of finance
to proceed on the basis that an individual may be adjusting their personal constructs
and thus their perceptions, beliefs and expectations in the face of new experiences.
It also should be recognised that at times an individual may be immunising some
areas of their personal construct system from adjustment to an alternative
perspective, even in the light of new experiences. This may be because they feel it is
in their interests to maintain current perspectives and beliefs; or for personal reasons
prefer to present a distorted picture (Kelly 1955). A self-serving bias may exist among
some ‘would-be’ and existing entrepreneurs with regard to their perception of factors
that contribute to or impede their success; for example a possible bias that blames
external factors for failure (Rogoff et al. 2004). For instance, entrepreneur self-
reporting on issues such as personal abilities or inabilities carries a caveat in
interpreting the data in terms of “the susceptibility of respondents to fall prey to self-
serving bias and impression management” (Fraser 2005). Moreover, while an
entrepreneur’s personal construct with regard to a given issue gives focus to what is
happening, it is effectively an abstraction of a limited boundary of reality which will
also blind the entrepreneur to wider contextual issues that may have relevance.

Thus, the identification and review of evidence relating to the impact of perceived
access to finance difficulties to which this study relates is undertaken subject to the
above definitions and caveats.

4. LOCATING THE PROBLEM OF ‘PERCEIVED DIFFICULTIES IN ACCESSING

FINANCE’

Overview

In this section we consider in which socio-economic groups and communities there

are most likely to be perceived difficulties in accessing finance. In recent years
there has been a substantial amount of research concerned with looking at
enterprise and entrepreneurship in deprived areas and communities. Although the
question of how ‘would-be’ and existing entrepreneurs perceive the process of
accessing finance is rarely tackled directly in these studies, they do nevertheless
provide some useful insights into the nature of the anticipated and actual difficulties
experienced which in turn contribute to commonly held perceptions.

The evidence indicates various cultural influences on the perception of BMEB

entrepreneurs, there being a commonly held expectation amongst certain ethnic
groups that they will be treated adversely, particularly by commercial banks.
Perceived institutional discrimination affects BMEB entrepreneurs willingness to
approach banks for finance in some areas. A ‘discouraged borrowers’ attitude exists
among some BMEB ‘would-be’ entrepreneurs who feel it is fruitless, given their
background, approaching the banks for finance. It is likely that most viable ‘bankable’
businesses in these areas could access required finance, but the challenge relates to

14
supporting potentially viable businesses that face constraints, including perceptions
of mistrust or suspicion of formal institutions. A number of studies also indicate that
entrepreneurs living in deprived areas perceive themselves to be disadvantaged in
obtaining bank finance because of a lack of collateral, arising from low property
values or a dependence on rented living accommodation, and lack of personal
savings. There are also indications that perceptions by entrepreneurs have been
adversely affected by various supply-side changes, notably bank rationalisation
leading to the removal of small business support services from local areas.

Women are another group where issues of perception with regard to accessing
finance appear to be particularly important and here there are recent and current
studies that provide particularly helpful insights. The issue of low confidence levels
amongst female ‘ would-be’ and existing entrepreneurs surfaces in several studies,
leading to negative perceptions about their chances of success in applying for
external funding. Consequently, there appears to be a greater reliance on informal
sources amongst women. There is evidence that issues such as inadequate
personal assets, sexual stereotyping, and lack of business track record contribute to
finance being a challenging issue for some women. Women invariably use less
capital at start-up than men and are more likely to encounter credibility problems with
bankers. However, women who present a viable business proposition with adequate
collateral and who show credibility are likely to be successful in loan applications.
Some evidence suggests that women’s perceptions are influenced by the type of
business many of them are running (i.e. low tech service businesses) and the fact
that they do not fit normal entrepreneurial stereotypes (i.e. they favour part-time,
flexible working). For these reasons they may be reluctant to enter into long-term
financial commitments.

With regards to the influence of age, available evidence suggests that the attitude
and perceptions of graduate ‘would-be’ entrepreneurs to business start-up is
influenced by existing debt levels resulting from their studies, whereas many of those
aged over 50 contemplating business start-up have concerns about using their own
savings given the potential impact of age on recovering any losses.

4.1 Disadvantaged areas and deprived communities

4.1.1 The Bank of England (2000) study of finance for small businesses in deprived
communities is an inaugural report which aims to identify the key issues and provide
a benchmark against which progress can be assessed. The study covers all parts of
the UK and utilises an extensive series of regional visits to a mixture of urban and
rural areas, drawing on the expertise, local knowledge and contacts of the Bank’s
twelve regional agencies. A wide range of perspectives were derived from meetings
with representatives from businesses, finance providers, CFIs, councils, credit
unions, support networks, etc. In the absence of significant quantitative information
relating to small business access to finance the Bank utilised main clearing banks
customer base data. To a great extent, however, the report draws upon anecdotal
evidence to flag up potentially crucial issues.

The report highlights several potential barriers to accessing finance in deprived

communities. Whilst constraints centring on information asymmetries are not
restricted to lending in deprived communities, such asymmetries may be accentuated
within them.

The level of new business start-ups may be constrained by a lack of collateral which
can be affected in deprived areas by low property values or ‘would-be’ entrepreneurs

15
living in rented accommodation. Anecdotally, the report offers the example of the
substantial fall in property prices in Salford in the North West region which had taken
place over the few years prior to the investigation as indicative of possible sources of
collateral shortages. Anecdotal evidence also suggests that many individuals living in
deprived communities frequently are reluctant to agree to offer security or guarantees
even if they do possess personal assets. It is considered unlikely that ‘would-be’
entrepreneurs living in deprived areas will have adequate personal savings to provide
a capital injection that a bank may expect from a loan applicant as demonstration of
commitment and bearing of risk.

The Bank of England (2000) study suggests that inadequate business skills, limited
work experience and access to role models and restricted opportunities to use and
benefit from informal contacts and networks are key factors that may constrain start
up and successful development of a viable business in deprived areas. Background
and experience thus contribute significantly to the framing of current perceptions in
terms of a ‘would-be’ entrepreneur’s views and personal constructs of
entrepreneurship, and limited opportunities to network and interface with role models
and informed contacts restrict the potential for adjusting existing views and
perspectives.

A particular supply-side issue highlighted by the Bank of England report is that of the
effects of bank rationalisation on small firms in deprived communities. The
concentration of branch closures in urban areas can have an adverse impact on
individuals in deprived areas in terms, for example, of increased time to visit the bank
and the possible need to carry large sums of cash, often in high crime areas.
Moreover, the issue of remoteness from a branch can result in reduced opportunity
for a business to develop a sound relationship with its bank and possibly reduce
confidence in dealings with the bank (see also 7.1.3.)

A key conclusion of the Bank of England report is that the evidence suggests that
‘bankable businesses’ within deprived communities face issues when raising finance
that are very similar to those of businesses in more prosperous areas. Business
advisers consulted in the study suggested that the majority of viable businesses
could raise needed finance. Potentially viable businesses may, however, be
constrained in their attempts to access finance by the kind of factors outlined above.
One danger is that finance providers may perceive businesses or ‘would-be’
entrepreneurs as less viable and the challenge is to determine how to support
businesses with the potential to progress from being ‘marginal’ to ‘bankable’.

4.1.2 The SBS commissioned study (Allinson et al. 2005) suggests that the
perception of the difficulty to get a start-up loan is reasonably accurate for individuals
from lower socio-economic groups who lack initial capital. The report also suggests
that people from an ethnic minority background are more likely to believe that it takes
longer to start a business and that there is also too much red tape in the financial
process. It seems that cultural factors can affect the relationship between the small
firm and lending institutions. The SBS report suggests that the way to tackle this
perception is to organise seminars on specific topics and to tailor advice to a
particular ethnic community accordingly.

4.1.3 In Scotland, perceived institutional discrimination appears to be a factor leading

to reluctance on the part of BMEB entrepreneurs to approach external sources of
finance (Deakins et al., 2005). Interviews with the owners of 41 BMEBs showed that
they had a heavy reliance on personal and family sources, both at start-up and post
start-up. There was a marked reluctance amongst these Scottish BMEBs to
approach or attempt to use bank finance after start-up or for development finance,

16
even amongst second generation owners. In some instances there was a perception
that the time involved in submitting an application for loan finance was not worthwhile
coupled with the view that it would involve considerable paperwork and bureaucracy.
In other cases there were strong feelings against using banks based on cultural and
religious practices as well as concerns about language barriers resulting from the
limited employment of ethnic minority staff by the banks themselves. Interviews with
mainstream finance providers showed that whilst they were aware of these issues,
there had been limited attempts to reach into the BMEB communities because of the
practise of ‘treating all businesses the same’.

4.1.4 A seminal report relating to enterprise in deprived areas focuses on enterprise

and social exclusion and was undertaken as part of the National Strategy for
Neighbourhood Renewal (Policy Action Team 3 Report, HM Treasury, 1999).
Drawing upon evidence from a number of research studies, the report refers to a
number of common perceptions about the difficulties of accessing finance found
amongst small business owners in deprived areas. For example, the study refers to
how trends in banking, such as the rationalisation of branch networks, have led to the
perception amongst SMEs that the gap between the supply of finance and the
demand for it has widened (this is discussed in 7.1). It also refers to evidence
showing that many BME businesses perceive themselves to be treated adversely in
obtaining finance, feeling that the standards applied to them are more exacting than
to non-BMEs in terms of proving the business case. On the basis of evidence
showing that there is a gap between the provision of banking finance and the needs
of enterprises in deprived areas, the PAT3 report sets out the case for a number of
community finance initiatives which go beyond the strictly commercial criteria for
supporting what are often marginal businesses to take into account the wider social
benefits of supporting enterprise development in deprived areas. The PAT3 report’s
recommendations led to the creation of the Government’s Phoenix Fund aimed at
encouraging enterprise in disadvantaged communities by assisting entrepreneurs
who experience difficulties in starting new businesses, or developing existing firms,
due to the lack of support and access to finance. One element of the Phoenix Fund
has been support for the Community Development Finance Institutions (CDFIs)
which in turn are concerned with addressing market imperfections in the provision of
finance to new and existing enterprises, particularly those run by entrepreneurs from
disadvantaged groups.

The SBS commissioned evaluation of the CDFI included an interview survey of client
enterprises in disadvantaged areas (GHK, 2004). This shows that most clients
received financial assistance in the form of a loan, the average size being £7,200.
Three quarters of the interviewed clients had looked to other external sources of
finance but had been refused. Just under half (47 per cent) claimed that the loan was
crucial to being able to start or expand their business and a further 19 per cent said
that they would have had to close their business without the loan. This therefore
gives a measure of the ‘gap’ that exists in the market which the CDFI is helping to
bridge. The finance provider interviews also indicated that there was very limited
‘deadweight’ associated with CDFI lending to clients since they did not regard the
CDFI clients as ‘bankable’ firms. The researchers estimate that just 5 per cent of the
CDFI clients could have been funded by other external sources.

4.1.5 Collard et al (2001), in their UK study of disadvantaged areas, highlight how

self-employed people residing in communities with high levels of overall deprivation,
held a very critical view of their banks and faced real difficulties in accessing small
amounts of working capital. The study focused upon local people (business and non-
business) in Bristol’s Barton Hill district who were on the margins of financial
services. The study adopted a participative research approach, beginning with a

17
series of six focus groups to identify the main difficulties that people experienced
getting access to financial services. The groups embraced 42 participants: men and
women of all ages, disabled people and people from the Afro-Caribbean and Somali
communities. These group discussions were followed by in-depth interviews with a
range of financial service providers (banks, Post Office, Association of British Credit
Unions staff). Finally, two ‘select committees’ were run (for a full day each) to allow
local people to consider all information gathered and to hear from, and cross
examine, 13 of the service providers who had been interviewed.

Key issues highlighted by the study relate to a lack of individual understanding as to

how to approach the issue of raising finance i.e. financial illiteracy, uncertainty as to
whether banks can help ‘somebody like me’, a perceived affect on customer
orientation with regard to the banks’ centralising of their services and, for the Somali
women, the need for a creative approach to provision in the form of non-interest
bearing loans. A crucial policy issue centres around the views conveyed by many
younger individuals in the study that they ‘felt ill-equipped to manage money in the
early years of adulthood’. Integral to this is a perspective of mistrust toward formal
organisations who they felt might exploit their ignorance.

4.1.6 The ‘Enterprise People, Enterprising Places’ study of ethnic minority

employment and business growth draws attention to the increasing importance of
BME businesses within the UK economy (National Employment Panel, 2005). The
NEP commissioned data from the GEM survey which shows that entrepreneurial
activity amongst ethnic minorities is higher than amongst the white population (7.4
per cent and 4.7 per cent respectively) and that this difference is particularly marked
for those in the 18-34 age group. The study cautions against a generalised
perception that access to finance for BMEBs is a serious problem, although it does
accept on the basis of previous research (notably British Bankers Association, 2002)
that Black Caribbean firms have had much less success in accessing bank loans
than other ethnic groups. However, evidence from the SBS booster survey does
indicate that BMEBs are more likely to experience difficulties in accessing finance
than non-BMEBs. Whilst the proportion attempting to obtain finance over a 12 month
period is almost the same (24 per cent), the proportion of BME firms reporting
difficulties in obtaining finance from their first source was twice that of non-BME firms
(20 per cent compared to 10 per cent). The key reason put forward for this is that a
significantly higher proportion of BMEBs are seeking finance to buy or improve
premises than non BME businesses, coupled with the fact that a higher proportion of
BMEBs are located in deprived areas. It is suggested that banks are less willing to
lend money to extend or refurbish premises in deprived areas. The NEP study
suggests that the practice of ‘redlining’ i.e. withholding finance from neighbourhoods
considered to be high economic risk, is resulting in indirect if not overt discrimination
against many BMEBs.

4.1.7 A study of business issues and support needs of African and Caribbean
business owners in London, utilising focus groups and semi-structured interviews
with 28 owner managers, revealed that many of the owner managers perceived that
external finance is difficult to access and some did not approach a bank for funding
because they felt that they would be unsuccessful. For some, this was due to a
perception of negative stereotyping on the part of the bank manager (CEEDR 2000).

4.1.8 An evaluation of the Brent Business Venture’s Fresh Start in Business

Programme (CEEDR 2005) unfolded further evidence of a ‘discouraged borrowers’
attitude amongst some BMEB entrepreneurs who were trying to start a business for a
second or third time and who felt that, given certain personal characteristics or lack of
banking track record, it would be futile to attempt to seek out external finance.

18
4.2 Female would-be and existing entrepreneurs

Women are another group where there are reasons for thinking that their access to
finance may be affected by the perception they have about the difficulties involved.
Here there are a number of recent and current studies that provide helpful insights,
particularly relating to the issue of confidence, their knowledge of alternative sources,
the types of businesses they are engaged in, and their attitudes to risk.

4.2.1 Jones and Tollos’s (2002) investigation of the perceived needs of male and
female Hispanic and Anglo pre-venture entrepreneurs with regard to financial and
accounting assistance draws attention to the potential impact of low confidence
levels amongst female ‘would-be’ entrepreneurs. Groups of male and female pre-
venture entrepreneurs participated in a self-assessment process. The women
entrepreneurs perceived that they require more help in the area of financial and
accounting needs than the male pre-venture entrepreneurs. However, when each
group was assessed by the study consultants, the consultants perceived that it was
the male group that required more help: a reverse interpretation of the female clients’
perceptions which suggested that the female entrepreneurs needed less financial
accounting assistance than the males. A key conclusion was that the participant
females’ views of help needed may reflect low confidence levels.

Integral to this and other studies (for example, Brown 2002) is the possibility of many
female ‘would-be’ entrepreneurs underestimating or failing to recognise their real
capabilities and to possess a real fear of failure (GEM Monitor 2002) and that a
support approach should consider ways of building the self confidence of such pre-
venture women entrepreneurs.

4.2.2 A recent Canadian study of nascent entrepreneurs (Menzies 2004) draws

attention to the need for care in the interpretation of barriers to venture creation and
development by women. The exploratory random sample study utilised telephone
interviews to compare 52 women and 92 men throughout Canada across a number
of constructs relating to new venture start-up and development and the findings
suggest that in many instances women are very similar to male nascent
entrepreneurs. This includes contradiction of some issues that Menzies suggests
may be derogatory myths, one of which being that women do not have the financial
savvy to start high growth businesses. For Menzies, the presence of stereotypical
myths about women impacts and influences potential and existing female
entrepreneurs, and those associated with women in business such as bankers,
clients and suppliers.

Wilson, Carter, et al (2006 forthcoming), emphasise that there is little conclusive

evidence regarding why finance poses such a challenge for women business owners.
Although some studies point to sexual stereotyping, discrimination, lack of banking or
profit track record and inadequate personal assets, other studies fail to confirm such
findings. This is in part due to the different research methodologies used.

4.2.3 Harrison et al. (2005) have investigated women’s perceptions of the experience
of raising finance for the start up and growth of their business, based on a purposive
sample of ten female entrepreneurs in Northern Ireland operating in sectors not
normally associated with women run businesses. The results suggest that the
women in the study perceived sourcing finance to be a problematic issue, particularly
at start-up; for example, “at start-up financing was very difficult – for the first couple of
years it was very scary.” These negative perceptions on the demand side were
despite the fact that the investigation of the supply side revealed no evidence of

19
conscious discrimination against women-owned businesses on the part of banks (see
also Carter et al., 2005). The interviewed women also had negative perceptions of
banks as sources of finance, as illustrated by the following quotes: “the company is
not interested in bank finance because the banks are risk averse and don’t
understand the needs of small businesses”; and “the banks want to lend you money
when you don’t need it, but are unwilling to lend you money when you do need it.”

Similar views amongst women of the difficulties of accessing bank finance were
found in a study in North West England which interviewed 22 women and involved a
further 77 in four focus groups (Fielden et al., 2003). These were all women who
were either considering starting a new business, were in the process of business
formation, or were operating a new small business. The study indicated that over 57
per cent of women in business start-ups had received help from the new business
owner package provided by the high street banks and were pleased with the help
they had received. However, established business owners were far more sceptical
and over 75 per cent were unhappy with the relationship they had with their bank.
They reported that the banks provided a poor service that was extremely costly,
demanding high charges over which they had no control.

4.2.4 The difficulties faced by women in acquiring external finance tend to be due to
a smaller stock of start-up resources and less familiarity with credit sources (Brush et
al., 2005). Their access to equity funding is still extremely limited (Carter et al., 2002)
and consequently Brush et al. (2005) suggest that women use bootstrapping
methods to finance their ventures (see also 6.3). In a study of women entrepreneurs
in Ireland, based on a survey of 131 of them in the Dublin region, Browne et al.
(2004) argue that female entrepreneurs are handicapped by their lack of experience
in business and financial services, many of them having had careers in marketing
and human resources previously. A second disadvantage is that they tend to
operate businesses which are low tech micro enterprises in the personal service
sectors, have low equity, and have limited growth potential. And thirdly, women
entrepreneurs may see themselves as not fitting the normal business owner
stereotypes in that they are not prepared to sacrifice their right to flexibility, family
and lifestyle. Family factors, and especially parental status, play a key role in
shaping fundamentally different perceptions among different types of women
entrepreneurs, with those with dependent children tending to place more emphasis
on independence as a measure of success than other types of entrepreneurs (Justo
et al., 2005).

In terms of raising money to start their business, women are more likely to be more
pessimistic than men according to the SBS’s study of the myths surrounding starting
and running a business (Allinson et al, 2005). This study validates the findings in
Carter et al., (2001) which show that it is more difficult for women to raise start-up
and growth finance and that women encounter credibility problems when dealing with
bankers. The report stresses that women start in business with only one-third the
amount of capital used by men and that men are more likely to use external financing
for on-going business than are women. Wilson et al (2006) also suggest that women
are more likely to have concerns about the extent to which bank lending officers are
even-handed in their treatment of clients (see 7.1.7).

4.2.5 Marlow and Carter’s (2006) study on the link between finance, gender and self-
employment combines quantitative and qualitative research of key issues and
concepts. Using an electronic survey of owners of small accountancy practices, the
study examines the views of ACCA members with regard to business advice and
gender: 564 responses were obtained. A telephone survey focused on 30 male and
30 female small-firm owners to facilitate examination of the experiences of small firm

20
owners regarding funding experiences. The key issues revealed by these surveys
were then investigated further: five female and five male small firm owners and five
male and five female accountants who were also owners of small practices took part
in in-depth semi-structured interviews. External views regarding how gender might
affect business funding decisions and advisory preferences were sought through
interviews with four bank lending officers, two Business Link advisers and four self
employment advisers from community support projects.

The study demonstrated how gender is influential in shaping the experience of

business ownership for female small firm owners and female accountants running
their own small practice. For example, female owned firms are more likely to be
smaller, to operate on a part-time basis, to be located in lower-order services, and
develop around the domestic responsibilities of the owners. Many have fewer growth
ambitions.

With regard to how gender considerations influence the supply of and demand for
business finance, Marlow and Carter’s study confirms: (a) existing literature in terms
of women favouring informal sources of finance, retained profit, grants and to a
lesser degree bank finance, with men more likely to draw upon a range of formal
funding options; and (b) the Fraser (2005) investigation in that it seems the majority
of firm owners have few problems accessing their preferred sources of funding
(mainly in the form of personal savings, grants and bank financing).

The study also found that all key individuals in the financing process (owners,
accountants, bankers, and advisers) agreed that viable applications for formal
funding which are adequately prepared, are for viable businesses and considered to
have credibility and adequate collateral are likely to be successful. Overall, therefore,
Marlow and Carter felt that it is difficult to support the notion of there being a ‘finance
gap’, at least for female owned accountancy practices.

The evidence of the study does, however, underline that the demand for finance is
influenced by gender considerations in that women seem to be more risk averse than
men; they tend to apply for smaller amounts when seeking formal funding; and to a
certain extent appear to be reluctant to reapply to other sources of finance if initially
refused. The findings do support Carter et al (2001) in showing that if businesses
have lower levels of overall financial capitalisation, lower levels of debt finance and a
greater reliance on personal savings, they are likely to under perform and be more
vulnerable to termination.

4.3 Influence of age on attitudes to finance

4.3.1 With regards to the influence of age on attitudes to finance, there is some
indication from focus group evidence that younger ‘would-be’ entrepreneurs are
reluctant to take on more debts until they have cleared their student loans (Allinson et
al. 2005). It might be suggested that with more of the cost of higher education falling
directly onto students themselves, this is becoming an important barrier to potential
graduate entrepreneurs. The average student dept was £12,500 in 2003 and is
anticipated to reach between £20,-30,000 after 2006 when top-up fees kick-in
(Barclays Bank, ACCA-NGCE, 2004). The National Council for Graduate
Entrepreneurship is therefore concerned that levels of graduate entrepreneurship
may decrease as graduates perceive that entrepreneurship is yet another financial
risk too great to engage in and parents will be unwilling or unable to provide
additional funds to help their children into self-employment and business start-up
(ACCA-NGCE, 2004)

21
There are also indications of a cautious attitude towards accessing finance by those
aged over 50 who are going into self-employment or starting a business (Allinson et
al. 2005). Whilst they invariably have their own funds, they tend to be reluctant to risk
these given the affect of their age on their chances of recouping losses.

5. THE SOCIAL EMBEDDEDNESS OF THE ENTREPRENEUR

Overview

As postulated by social network theory (2.2), the extent to which’ would-be’ and
existing entrepreneurs are ‘socially embedded’ will be a key influence upon their
perception of the ease with which they can access different sources of finance.
Numerous authors have emphasised the importance of social networking to learning
about how to run a successful business, including overcoming barriers to financing.
Despite this, much of the evidence indicates that many entrepreneurs fail to fully
exploit the advantages of networking, that a suspicion of external agencies was one
of the barriers that needed to be overcome, and that women entrepreneurs are less
likely than their male counterparts to engage in business networks. However, from
these studies it is only possible to infer the influence of social networking on
perceptions to accessing finance, there being no study which addresses this
explicitly.

5.1 Social Networking

5.1.1 There is indisputable evidence that successful start-up and growth-seeking

small businesses utilise networking activities to obtain key information, underpin
learning about their opportunity and problem contexts (Wyer, et al 2000) and to gain
access to, or enhance understanding of, sources of finance (Steier and Greenwood
2000). The more progressive ‘would-be’ and existing entrepreneurs are consciously
aware of the positive role of ‘dialogical learning’ (Hawkins 1994) through interactions
and dialogue with key informants on the boundaries of the start-up or new venture’s
activities, including potential customers, suppliers, distributors, bank managers,
accountants and lawyers. However, many ‘would-be’ and existing entrepreneurs fail
to fully exploit the advantages integral to networking due to a lack of awareness or
understanding of its benefits, or perceived or real barriers to network inclusion.
Barriers faced by small businesses in seizing network opportunities vary greatly
depending on the type of firms, including level and forms of innovativeness (OECD
2004 (a)), and on the characteristics, capabilities and perspectives of individual
entrepreneurs. For example, it is suggested that for a variety of reasons, including
lack of previous management experience or contacts and low confidence levels,
some women find it extremely difficult to access informal financial networks (Olm et
al, 1988). Whilst some studies have begun to question propositions such as the level
of women’s management experience vis-à-vis men (Menzies 2004), it is clear that
some individual entrepreneurs (male and female) are faced with real barriers with
regard to networking and/or are unaware of the resource and knowledge-adding
potential of networking as a management process. The Bank of England (2000)
report discussed earlier reiterates such potential constraints for small businesses
attempting to start-up or operate in deprived communities.

5.1.2 Indicative of this are the findings of a study of barriers to innovation and
networking in small firms in Cardiff which revealed that, whilst financing was

22
overwhelmingly perceived as the greatest constraint on innovation, “the use of
external actors to help overcome barriers to innovation is extremely limited, despite
the wealth of literature advocating how networking is proving to be a universal
solution to small firm problems – it may be that small firms in Cardiff have yet to be
convinced” (Williams 1997). Whilst a generally positive impression was portrayed by
some of the participant small firms, a common complaint was that the kind of help
offered is too general. Other firms had formed negative opinions even though they
had not interacted with an agency. The study concluded that many of the negative
perceptions and impressions expressed “are based on presumptions that are untrue”.

5.1.3 Integral to effective utilisation of network opportunities is ‘would-be’ and existing

entrepreneur’s ability to ‘learn-how-to-learn’. For some commentators, “while some
financial constraints have been traced to failures in the market for information and
advice, it is less likely that this is due to lack of availability of information. It is perhaps
more related to lack of awareness of sources of information or to management
competence” (Cook 1999). It has been suggested that the majority of SMEs do not
take full advantage of networking opportunities and that this is due to their lack of
motivation and low capability levels. Organisational inadequacies, unavailability of
key information and/or a lack of management skills prevent owner manager self-
diagnosis of needs and reduce the perceived value of organisational innovation,
including networking (OECD 2004b).

5.1.4 Vos et al’s (2005) study of SME access to finance and propensity to grow (see
6.1.4), emphasises the significance of the role of networks and connections and how
entrepreneurs’ social relations are crucial in broadening access to sources of
external funds. For instance, ongoing or previous SME-bank relationships, as
indicated by some theories of financial intermediation (see 2.4), convey private
information about the small business financial performance and give the bank
confidence regarding provision of further financial support.

5.1.5 It should be emphasised, however, that social networking can also have a
negative impact on the perspectives and behaviours of ‘would-be’ entrepreneurs. For
example, whilst no clear empirical evidence has been found in this review, Personal
Construct Theory would suggest that it is possible that network learning interactions
with individuals who have unfounded pessimistic views of finance providers and
business advisers can negatively affect the views and understanding of ‘would-be’
entrepreneurs and constrain positive enterprise development activity.

6. ENTREPRENEUR PERCEPTION AND AWARENESS WITH REGARD TO

ALTERNATIVE METHODS OF RAISING EXTERNAL FINANCING

Overview

In some respects, it is difficult to obtain a coherent picture of entrepreneurs’

perceptions of alternative methods of raising external finance as the existing
literature covers a range of different national and regional contexts as well as
reflecting different research methodologies. With a few exceptions, the issue of
perception has not been addressed explicitly, although researchers often interpret
their findings in terms of the views and attitudes held by entrepreneurs.

There have been a number of large-scale surveys aimed at gauging the extent of
use of different sources of funding and levels of satisfaction with them. These tend
to confirm ‘the pecking order hypothesis’ in showing that at pre-start and start-up,

23
entrepreneurs have a strong preference for using personal and informal sources of
finance and that the use of external debt finance (particularly bank overdrafts)
becomes more common once the business is up and running.

Many small enterprises rely on bank overdraft facilities and loans as the main source
of external finance with some studies pointing to relative ease of access to such
funding. There seems broad agreement that it is the perception of’ would-be’
entrepreneurs that they will be unable to provide the necessary security which is the
main reason for not applying for bank finance.

Individuals from lower socio economic backgrounds are more likely to perceive
difficulties in accessing bank finance. There is also evidence that younger business
owners are more likely to express dissatisfaction with banking issues and availability
of loan and overdraft finance. A perception exists amongst some individuals seeking
self-employment that banks are formula-driven, lacking adequate understanding of
small business needs, and that this is likely to be a barrier to them accessing bank
finance.

Particularly interesting is the number of studies drawing attention to the increasing

preference that entrepreneurs have for various ‘bootstrapping’ methods of financing,
one of the most commonly used being personal and business credit cards. The ease
of accessing un-secured capital and flexibility are perceived as the main advantages
over other external sources of finance, with several studies emphasising the need to
educate existing entrepreneurs and ‘ would-be’ entrepreneurs as to the advantages
and downsides of utilising such funding methods.

Equity finance tends to be the least preferred source, concerns over the loss of
managerial control being cited in most studies as the perceived disincentive. Informal
investors such as directors, friends, family and existing shareholders are preferred
sources of equity for many ‘would-be’ entrepreneurs as they strive to address the
funding gap and maintain control of the business. For some high-tech start-ups,
business angels provide a viable alternative to bank funding in that they provide a
package of value-added which includes expertise and business contacts.

Negative perceptions of’ would-be’ entrepreneur regarding availability of grant aid

often reflect a lack of understanding of what funding is available and how to access
it.

6.1 Studies covering a range of sources

6.1.1 The evaluation of self-employment assistance provided by The Prince’s Trust

gives robust survey evidence of alternative funding sources for start-up enterprises,
based on two thousand responses from client entrepreneurs (Department of
Education & Skills, 2001). Besides funding from The Prince’s Trust, the three most
commonly used sources were personal savings or assets (23.6 per cent), bank loans
or overdrafts (13.6 per cent), and loans or gifts from friends and relatives (8.3 per
cent). However, the amounts invested from these other sources tended to be very
small, with a mean of £2,748 (median £1,500), although the average size of bank
finance tended to be larger (mean £3,362; median £2,000). Interestingly, the authors
of the study conclude that it did not appear that The Prince’s Trust was compensating
for deficiencies from other sources, although they do qualify this by saying that two-
fifths of the sample received no funding from non-Prince’s Trust sources.

24
6.1.2 This conclusion is contradicted by other evidence relating to the demand for
start-up finance. An Advantage West Midlands commissioned study (AWM 2003)
investigated the market gaps in mainstream provision of loan finance of up to
£50,000 to micro, small, medium and social enterprises in the West Midlands. The
study involved demand-side analysis of access to finance gaps using existing survey
data; in-depth telephone interviews and face-to-face survey interviews with bankers
and CDFI practitioners; and a funding review of available funding for CDFIs. The
research findings emphasise that micro-enterprises experience an access to finance
gap. The study estimates that there are approximately 18,000 West Midland’s micro-
enterprises (both formal and informal) that cannot access mainstream finance, but
which do have a viable business and the capability to take on and sustain debt to
support the growth of their business. These findings are largely consistent with those
of the evaluation of the CDFI (see 4.1.4) in showing that there is a substantial
demand for external finance from micro enterprises that are not considered
‘bankable’ by mainstream providers.

The study also estimates that at least 10 per cent of the unemployed have an
orientation toward and interest in starting a business. This represented 14,000
potential business start-ups out of those unemployed in 2003. It is felt that
approximately half of these businesses would have a sufficiently viable business idea
to be a good credit risk, but access to finance would be the main constraint since
such ‘would-be’ entrepreneurs would not get a loan from a bank.

6.1.3 In the context of businesses located in deprived areas, the Inner City 100 study
provides survey evidence on the 100 fastest growing inner city firms. For the
purposes of this review it is of limited value as it is concerned with established
businesses of various sizes, rather than pre-starts or start-ups, although it does
capture some young rapidly growing businesses. Also, because they are the most
successful inner city growth firms, they are not typical of inner city businesses.
Moreover, because there is not a control sample, it is impossible to know the extent
to which fast growth inner city firms differ from their counterparts elsewhere.

However, with these significant qualifications in mind, the IC 100 study does provide
some evidence on the attitudes of business owner-managers to accessing finance
from a range of sources. When asked about the factors limiting their growth, access
to finance emerges as one of the two main factors, (alongside access to skilled
workers), with 25-30 per cent identifying this as limiting their growth in the 2001-2003
surveys. For these fast growth businesses, both bank loans and overdrafts were
important sources of growth finance (each being used by 19 per cent of the surveyed
firms) and levels of satisfaction with services provided by the banks were high.
Although two thirds of the IC 100 firms had considered venture capital at the time of
the 2004 survey, only 8 per cent had pursued it successfully, and this did not include
any of the women-owned businesses. Fear of ceding control over the business was
the main reason cited for not taking the venture capital option any further.

It is also worth noting that, according to the authors of the IC100 study, the survey of
fast growth businesses showed a significant information gap relating to the special
financial initiatives applying in deprived areas. Thus only 12 per cent of the firms
were aware of the Early Growth Funds and 22 per cent aware of Community
Development Finance Initiatives, whereas 63 per cent were aware of the Small Firms
Loan Guarantee Scheme.

25
6.1.4 Vos et al (2005) discussed the potential constraints on SME expansion, given
literature-based suggestions that a finance gap exists. The research considers
previous studies and analyses two large-scale data sets from the UK and the USA.
It concludes that around half of SMEs seek moderate growth that is in line with ability
to grow using retained profits generated through normal business activities. Those
SMEs that seek external funding usually obtain the finance they want. The study
suggests that “since most entrepreneurs value control and so prefer not to access
external debt, lower propensities to acquire outside funds need not imply financial
constraints for SMEs”…“control creates contentment for entrepreneurs”. The study
rejects conventional wisdom both with regard to the existence of a finance ‘gap’ and
that informational opacity deters SMEs from seeking external finance to underpin
their growth intentions. Most SMEs remain within the confines of their ability to
control growth and those who do seek external funds are usually successful.

Importantly, the study suggests that, in quantifying SMEs’ propensity to access

external funds, human factors are more important than financial attributes.
Information regarding SMEs’ likelihood to apply for external loans is conveyed by
owner manager characteristics such as level of educational attainment, age, amount
of personal investments and number of years on-the-job training.

6.2 Banks

6.2.1 Some indications of the attitudes of small business owners towards accessing
bank finance are provided by a large scale survey that the Federation of Small
Businesses conducted of its membership, based on 18,561 responses (FSB, 2002).
The survey found that dissatisfaction with the availability of loan finance and the
availability of overdraft finance was greatest among the youngest firms (those under
three years) and these levels of dissatisfaction decreased as firm age increased.
Dissatisfaction with banking issues was particularly marked among the youngest
business owners, with those aged under 21 expressing the greatest dissatisfaction
with the availability of overdraft and loan finance. Levels of dissatisfaction with bank
support for their business were found to be highest among the smallest size
businesses and least apparent among the largest ones. This largely reflects the
actual use of bank sources, since 70 per cent of businesses with annual turnovers of
over £500,000 used bank overdrafts, compared with just 41 per cent of businesses
with turnovers of less than £50,000. Similarly, almost all the larger businesses used
bank loans compared with just 34 per cent of the smallest businesses.

6.2.2 The SBS’s study of the myths surrounding starting and running a business
(Allinson et al. 2005) highlights that those from the lower socio-economic groups are
most likely to believe that bank finance is more difficult to obtain. Levels of
pessimism about the chances of obtaining a bank loan were found to be highest in
the poorest socio-economic groups (60 per cent of those in groups D and E
compared with 14 per cent in groups A, B and C). Those who had recently
considered entrepreneurial activity, but decided against it (‘active avoiders’), were
mainly deterred by what they perceived to be resource barriers (i.e. a lack of their
own finance or assets) rather than by a shortage of skills and ideas. However, very
few were found to have put this to the test by applying for external funding.

Some useful insights into the perceptions that people who are considering self-
employment or who are already running their own business comes from the various
focus groups carried out as part of the above study (Allinson et al. 2005). The
evidence here is based on 21 focus groups held in different towns and cities,
involving a total of 178 participants. Analysis of the reports of these focus groups for

26
the present study shows that a typical view amongst those considering self-
employment was that it would be difficult to obtain finance from the banks because
they are not prepared to understand the situation of small business owners as they
are ‘blinkered and rely upon a formula driven approach’. Many would also be
discouraged from obtaining bank finance because they are reluctant to pay bank
charges and interest rates, they have no credit history, and are concerned about
banks’ requirements for security. The financial implication of failure, particularly the
fear of losing a house, was a significant fear and a reason for the manifestly cautious
attitude to applying for loans. The following examples illustrate some of the
perceptions that members of the different focus groups had of the banks.

27
Perceptions of applying for bank finance by focus group members (Allinson et
al. 2005)

Participants complained that banks tend to be “poor at judging a good business idea” and that
they are particularly unhelpful to new small businesses: “once you’ve established and
generated your own funds, banks are more prepared to help”.

A participant was concerned about banks’ requirements for security – “you could potentially
lose all of your assets having done the hard work”.

Many of the group had either heard stories from others, or had talked to banks themselves,
and been offered what (to them) were disproportionately large sums of money in relation to
their earnings potential, with very high interest rates.

As a relatively affluent group, there was little aversion to borrowing money from a bank,
except that one person referred to an instance where a loan request for £1,500 was refused,
despite £30,000 of equity being available.

None of the group would consider borrowing from banks, with one of them suggesting that
banks were the “last place you would want to go” and prohibitively high interest rates were
expressed as “taking your eyes out”.

Regarding borrowing, four of the group thought this would be impossible, given that they were
unemployed and/or had no bank account or credit history. Opinions include “banks don’t lend
to the unemployed” and “loans depend on background”.

There was consensus that access to start-up capital through a bank loan would be very
difficult given the lack of assets of the group, and that risking debt was a major disincentive.

All members of the group regarded bank borrowing as offering prohibitive rates of interest.
One said, “We’d all love a low interest rate but the reality is a huge risk factor and large
interest rate”. A further issue was the casual interest of banks towards a business plan
“Banks don’t look at your business plan, just how much your house is worth”. The discussion
concluded with the statement that the best possible offer from a bank was the re-mortgaging
of property.

6.2.3 A Scottish Executive study (Hamilton et al. 2002) of the extent to which
difficulties experienced by SMEs have their origins in Scottish law focused on key
issues affecting the SME finance decision. The research involved semi structured
interviews with Scotland’s four major clearing banks to identify lending policy and
practices; with business advisers on the availability of finance and appropriateness of
different types of finance; and a survey involving 1253 SME respondents about
finance and security issues, including attitudes toward the provision of finance.

The SME respondents perceived banks to be the most important source of external
finance. The most important type of external finance was the overdraft (38 per cent);
followed by trade credit (33 per cent), loan finance (18 per cent), credit cards (5 per
cent) and leasing (2 per cent). Whilst not the most important source of finance, credit
cards were used by 36 per cent of SMEs (although 52 per cent of sole traders).

On analysing loan refusals, the study found that only 81 of total respondents (i.e. 6
per cent) had been refused loan finance at some point. Alternative external finance
was obtained in 49 of these cases and 34 of these were of the view that this
alternative finance was just as suitable as loan finance. Whilst the very limited data

28
available for analysis pointed to the need for caution when interpreting this owner
manager perspective, the authors of the report felt that this finding may suggest that
loan finance is sought for reasons such as perceived ease of accessibility or lack of
knowledge of other types of finance, rather than for reasons relating to
appropriateness of loan finance. The report attributes the very low number of
respondents being refused loan finance to the fact that the survey was capturing a
large number of ‘no growth’ businesses who may be less likely to apply for bank
funding.

The respondent SMEs clearly perceived that inability to provide security hindered
their chances of raising finance, this being most evident amongst those businesses
less than three years old. They also viewed privacy in relation to financial matters
very highly.

The Scottish Executive study concluded that SMEs’ awareness of alternative types
and sources of available finance was a function of their knowledge and interaction
with business advisers, enterprise councils and business banking officers, showing
once again the importance of engaging in business and financial networks.
Changes in bank lenders and borrowers’ perceptions of factoring was a significant
finding and the re-labelling of factoring to ‘cash flow finance’ was seen as a
conscious, direct attempt to change popular perception from factoring as a last resort
form of finance for a business in financial difficulty to factoring as an effective
financial provision to complement traditional bank products.

6.2.4 Based on evidence from 103 very small enterprises (i.e. employing less than 10
employees), Lean and Tucker (2000) show that 65 per cent of them relied on bank
overdraft facilities, compared with 21 per cent that had bank term loans and a further
11 per cent bank term loans guaranteed by the SFLGS. Moreover, most of the firms
in this particular survey thought that bank financing was easy to obtain, leading the
authors to conclude that for most firms a debt finance gap does not exist. When
asked about the difficulties faced in raising external finance, the majority of answers
demonstrated problems of information asymmetry (see 2.4 on financial
intermediation theories); the most commonly identified difficulty was the lack of
knowledge that finance providers had about the nature of the client’s business and
43 per cent cited their own lack of knowledge about lending criteria and difficulties in
accessing information about available finance. As far as these entrepreneurs were
concerned, a lack of securable firm assets was a more frequently cited difficulty (48
per cent) compared to a lack of a financial track record (23 per cent), although this
probably reflects that only 16 per cent of the sample had been in existence for less
than five years.

6.2.5 Reliable statistical evidence of the proportion of SMEs who are discouraged
from applying for external finance comes from the survey of SME finances
undertaken for the SBIT, although given the nature of this large scale survey, there is
no qualitative information given on the reasons for their discouragement (Fraser,
2005). Extrapolating from a sample of 2,500 SMEs, it is estimated that 8 per cent of
businesses needing new finance (130,000 businesses) experienced discouragement,
corresponding to 4 per cent of the UK SME population. Not surprisingly, businesses
with fewer assets experienced the highest levels of discouragement, as did those
that were sole traders rather than partnerships (10 per cent and 2 per cent
respectively). With regards to specific types of finance, 7 per cent felt discouraged
from applying for overdrafts, 9 per cent from applying for term loans, and 7 per cent
from applying for lease/hire purchase asset finance.

29
6.3 Bootstrapping

6.3.1 Whilst many new venture start-ups may face a potentially constraining problem
in terms of lack of finance, alternative modes of funding beyond traditional business
credit are increasingly being utilised. Such methods of financing are encapsulated
within the concept of ‘bootstrapping’ and include informal methods such as the use of
credit cards, speeding up the invoicing process and negotiating best payment terms
with suppliers through to more formal modes such as equipment leasing and
factoring (Van Auken 2005). Reviewing the use of credit cards in small business
start-ups and everyday use by entrepreneurs in the United States, Lahm (2005)
suggests that bootstrapping is now the means by which most businesses start-up
and grow: “overwhelmingly, start-up entrepreneurs who do succeed in launching
businesses do so by using other non-traditional methods for creating and launching
businesses”. Referring to the existence of ‘discouraged borrowers’ (Kon and Storey
2003) and ‘discriminatory lending practices’ (Cavulluzzo et al. 2002), Lahm suggests
that ‘disenfranchised applicants’ for traditional business credit find alternative sources
of financial support, and thus may not retrospectively perceive access to finance per
se as a constraint on start-up and development, but nevertheless perceive difficulties
in accessing traditional sources of funding.

The 2004 UK Survey of SME Finances (Fraser 2005) found that, whilst
approximately 2 million UK SMEs (53 per cent) utilise overdraft finance, a similar
number (55 per cent) use personal or business credit cards. Monthly spend on
personal credit cards totals approximately £450 million and around £1.4 billion on
business credit cards. The Federation of Small Business Survey (2002) of its
members also shows the importance of credit card finance to very small businesses,
as businesses in the lowest size category (annual turnover of less than £50,000)
were more than twice as likely to use credit cards than businesses in the largest size
band (more than £5 million).

With regard to female entrepreneur financing strategies, Carter, et al. (2002) highlight
how the ventures of women that had succeeded in obtaining equity investment (vis-à-
vis those that were still trying to obtain equity funding) utilised bootstrapping options:
these included those options that use ‘other peoples’ money (customers, vendors
and employees) and those that control resources the business does not own (such
as leasing equipment).

Van Auken’s (2005) study of small technology-based firms found that owner-
managers gave a relatively low ranking to most bootstrap financing methods,
implying that this showed a lack of appreciation of the potential usefulness of
bootstrap capital and an inadequate understanding of the role of bootstrap financing
techniques. Integral to the work of Van Auken (2005) and Lahm (2005) is the
potential to educate and influence ‘would-be’ and existing entrepreneurs in terms of
their awareness and understanding of the various sources of bootstrap finance.
Such management education, in shifting entrepreneur perceptions, could elevate
non-traditional bootstrap finance to a deliberate choice strategy rather than using
them as a last resort source of finance (Winborg, 2005).

6.3.2 Whilst a number of large-scale surveys on small business finance have drawn
attention to the importance of bootstrapping methods (e.g. Van Auken (2005 in the
US; Winborg & Landstrom, 1997 and 2001 in Sweden), the evidence providing
insights into the reasons why entrepreneurs favour bootstrapping finance is as yet

30
more limited and relies upon case study evidence. For example, Winborg (2005)
examines motives for using financial bootstrapping in new businesses. On the basis
of findings from interviews with the founder/managers of four new businesses in
Sweden, the study identifies ten different motives with seeking to lower costs, lack of
capital and reducing risk being the three most frequently mentioned by the
interviewed business owners. These were all associated with eliminating or
minimising the need for more traditional sources of external finance. Similarly, a
study in the United States found that the main reason for using credit cards for start-
up capital was the ease of acquiring un-secured capital (Cole et al. 2005).

6.3.3 Various articles in the business press have highlighted the ease with which
credit cards can be obtained and used to finance a new business with the offers of
credit cards coming in the mail daily, promising low introductory interest rates and
sky-high credit limits. According to Rosenfeld (1999), the use of credit cards has a
number of advantages from the perspective of the entrepreneur, including flexibility,
saving time, allowing business expenses to be kept separate from personal ones,
high credit limits and potentially being a source of cheap credit if managed wisely. In
the US, the Federal Reserve Board estimated that 46 per cent of small businesses
used personal credit cards in connection with their start-up or ongoing operational
costs (Board of Governors of the Federal Reserve System, 2002). Of these, three
quarters stated that they used credit cards for start-up capital because of the ease of
acquiring un-secured capital, whilst another 17per cent indicated that it was their only
source of capital.

It might be suggested that the trend towards increased use of credit card finance may
not only reflect the increased availability of this type of credit facility, but also the
nature of many contemporary, knowledge-based businesses which only require small
amounts of starting capital and operate flexibly. For example, thinking a bank
wouldn’t be likely to loan money to a brand-new company whose commodity was
people, a participant cited in a study by Scully (2002) began to apply for credit cards
about six months before she left her job at a national consulting company to open her
own business since she “knew it would be almost impossible to find start-up capital”.

6.3.4 The perceptions of ‘would-be’ and existing entrepreneurs towards leasing and hire
purchase are that they are quick and easy to arrange with no hidden costs and fixed
deposit and it is easy to terminate the contract if the business slows down (Ekanem,
2002). The Bank of England (1999; 2000) indicates that, since the last recession, the
proportion of external finance to small businesses accounted for by leasing and hire
purchase has grown significantly, mainly at the expense of traditional bank finance.

6.4 Equity

6.4.1 The preferred sources of equity finance for ‘would-be’ entrepreneurs within the
Fraser (2005) study include directors, friends and family and existing shareholders.
This group of investors, known as informal investors, are considered to have an
important role in closing the finance gap for new and small businesses
(Saemundsson and Siguroardottir, 2005). Fraser (2005) suggests that a main reason
for raising equity from these sources is that of maintaining control of the business (1
in 5 business owners); a similar proportion of respondents cited ‘no need for another
source’ as the reason for the choice of investor; whilst less than 1 in 20 suggested
supply-side constraints as the reason, such as inability to raise equity from other
sources.

31
6.4.2 In a study of 20 Scottish-based entrepreneurs that had successfully obtained
business angel funding to start what were hoped to become high net value
businesses (mainly high-tech start-ups), Paul et al. (2005) advanced the concept of a
‘bridged pecking order’, since they found that in 14 of the cases entrepreneurs
moved from self- funding to external equity funding, rather than applying for debt
funding from banks. In these cases there was a high degree of agreement amongst
the entrepreneurs about the added value that business angels could bring to the
business, via their business contacts, commercial experience, and complementary
expertise. The authors of the study concluded that the role of external equity in the
long-term finances of these high value businesses contrasted with their view of banks
as being essentially short-term providers of debt finance.

6.4.3 The issue of control loss was addressed in Berggren et al’s (2000) study of
Swedish SMEs. Drawing on a sample of 281 Swedish manufacturing and service
sector firms of less than 200 employees and utilising a linear structural equation
modelling programme, the study attempted to determine under what circumstances
SMEs are prepared to strive for growth through acceptance of external control. It is
suggested that size, a perceived need to grow, technology development and financial
strength bring about a more open perspective and change in firms’ attitudes and
behaviour toward providers of external finance.

6.5 Grant sources

6.5.1 The SBS’s study of the myths surrounding starting and running a business
(Allinson et al. 2005) provides some insights about typical perceptions that those
considering going into self-employment or setting up their own business have about
the possibilities of accessing grant aid. A common perception was that significant
amounts of grant aid were probably available if only they knew where to look, the
main barriers they expected to encounter being related to lack of knowledge of grant
sources and how to find information about them. Those who had some experience of
applying for grants, or who knew people who had done so, frequently found that
there was less grant aid available than they had expected. Common complaints
were that there was a lot of bureaucracy involved and that the chances of success
tended to be a ‘postcode lottery’, leading to some disillusion and disappointment with
the experience. However, participants in the study did have a particularly favourable
view of Prince’s Trust funding, seeing this as being easier to apply for in the case of
those meeting its eligibility criteria.

The following examples illustrate some of the perceptions that participants in the
focus groups had about accessing grant based sources.

32
Perceptions for applying for grants by focus group members (Allinson et al.
2005)

The common view was that in order to qualify for grants you needed to be under 30.

They all had stories of following up possible sources, only to find they did not qualify (for
example, the Prince’s Trust, catering for young entrepreneurs, or the Business Link cut-off
point as a ‘start-up’ firm). This does seem an area of misconception: participants started with
the view that financial support (grants and soft loans) was available, but found that eligibility
criteria severely restricted access to such funds.

None of the group was knowledgeable about what Business Link may have to offer them, and
many did not know where to find or how to contact this organisation.

All members of the group believed that support for funding was widely available and were to
some extent aware of the availability of resources based on postcode, which several felt was
‘unfair’. There was some criticism of the ‘red tape and bureaucracy’ surrounding access to
public support, reflecting a common perspective that grant aid should for some reason be
easier to obtain than commercially available loans they rejected. However, they subsequently
found out that there was less available (i.e. for which they were eligible) than they imagined,
the consequence being that many people begin the process expecting there to be grants and
other support available and tend to feel disappointed and demoralised on discovering the
facts on eligibility and amounts available.

Most of the group had considered grant and other financial assistance, but none had been
successful in obtaining any so far – somewhat against prior expectations.

Despite living in postcodes where funding was available, most of the group were ignorant of
the grants available to them and had limited interest in obtaining grant aid.

Participants showed varying levels of awareness about possible funding sources. The
Prince’s Trust was held in high regard but most members of the group were not eligible to
apply, because of their age. There was an overall perception that schemes involved ‘huge
amounts of bureaucracy’ and sensitivity about the ‘postcode lottery’ of available funding.

There was a general impression that there ‘appears to be a lot on offer’, in terms of finance
for business set-up. Over half the group were too old to qualify for assistance from the
Prince’s Trust and knew this, but were not aware of similar funding that could offer
comparable benefits.

7. THE LENDER-BORROWER RELATIONSHIP

Overview

In this section we focus on literature relating predominantly to the supply-side in

order to consider how the practices of providers appear to influence the perceptions
of ‘would-be’ and existing entrepreneurs. There are relatively few studies that
address this issue head on but it is possible to glean some insights from studies that
are concerned with other aspects of the lender-borrower relationship.

In terms of accessing bank finance, there is EU evidence based on surveys of

existing SMEs to suggest that UK SMEs not only find it easier to access finance than
do their counterparts in many other European countries, but also that this has

33
improved in recent years, more so than in most other countries. On the other hand,
there are a number of UK based studies which indicate that the centralisation of
banking decisions has increased ‘the psychological distance’ between the bank and
small business borrowers, the negative perception effects being greatest in the case
of young firms. Trends in the banking sector seem to be impacting on relationships
with some small businesses with greater market concentration, centralisation of
business lending decisions and use of computer-based artificial intelligence systems
compounding various problems, such as the issue of information asymmetry.

There is also evidence to show that business lending officers, despite undergoing
similar training on the application of decision criteria, tend in practice to place greater
emphasis upon the personal characteristics of the entrepreneur, resulting in
concerns about a lack of even handedness and its adverse impact on the
perceptions of entrepreneurs. More positive perceptions of banks by small business
owners tend to be underpinned by more participative relationships and research has
shown the crucial role that accountants can play here, as trusted actors by both the
banks and entrepreneurs.

7.1 Supply-side impacts on borrower perceptions, attitudes and actions

7. 1.1 Some comparative insights with regard to the perceptions of entrepreneurs

toward banks is contained within the one-off EC (2005) ‘Flash Eurobarometer’ study.
Whilst not focusing specifically upon pre- or new-starts, the study, involving
telephone interviews of 3047 SME managers across 15 member states, does provide
key size-related observations. The study looks at the perceived ease of access to
finance currently felt by SMEs and how they feel this compares to a few years
previously. This is then used as context for examining SME managers’ attitudes
towards banks.

Within the UK, access to bank loans was perceived as easy by 70 per cent of
managers compared to 95 per cent in Finland and only 20 per cent in Germany.
Across all countries, SMEs in the construction industry (51 per cent) are most likely
to find access easy and those in services (41 per cent) the most difficult.

With regard to size of operation, the smaller the business the more difficult the
managers were likely to find access. Not surprisingly, if companies found access to
bank loans difficult, they were more likely to obtain finance from some other source.

The study also highlights how many SMEs were finding it more difficult within the 15
states to access a bank loan than a few years previously (42 per cent more difficult;
15 per cent the same; 33 per cent feel it is easier). Within the UK, 51 per cent of
managers felt it was easier compared to 85 per cent in Greece. In Germany 84 per
cent of SME managers find it more difficult.

With regard to attitudes towards the banks, 71 per cent of EU SME managers totally
agree that banks do not want to take risks in lending to companies. The study
suggests, however, that “the perceived hesitance of banks to want to take risks does
not affect the relationship SMEs have with their banker which is generally
favourable”. Two thirds (68 per cent) of SMEs perceive that their banker is sufficiently
supportive of their business with regard to finance (Ireland, 85 per cent; UK 73 per
cent; Germany 58 per cent) and 65 per cent feel their banker understands the
specifics of their company’s sector of activity (Luxembourg 80 per cent; UK 67 per
cent; Germany 57 per cent).

34
7.1.2 Drawing on evidence from over 6,000 small businesses who responded to the
1994 Forum of Private Business survey, Binks et al (1997) highlight the value of
sound relationships between banks and their small business customers. They point
to poor coordination between banks, SMEs and accountants and demonstrate how
more positive small business perceptions of their banks are strongly associated with
more participative relationships.

7.1.3 Lean and Tucker (2000 and 2001) argue that increased competition within the
banking sector has led to greater market concentration which has had the effect of
making banks appear more remote to small business entrepreneurs, thereby
increasing the psychological distance between them. They highlighted how trends in
the banking sector have compounded the problem of information asymmetry and
resultant issues of adverse selection and moral hazard (see 2.4 on theories of
financial intermediation). This includes: (i) the effects of greater market concentration
which has developed as a result of competition in the banking sector. The study cites
evidence (for example, Bannock and Doran 1991; Binks et al. 1991) that larger banks
are not as well placed as smaller/regionally-based banks for building close
relationships with small business customers; (ii) the trend of centralisation of
business lending decisions and the restriction of branch manager lending discretion
within very strict policy guidelines is felt to have placed the ultimate financing
decision maker even further away from the small business borrower; (iii) whilst
ongoing advances in ICT can arguably contribute to reductions in problems
surrounding information asymmetry, computer-based artificial intelligence systems
may lead to more standardised approaches to lending assessments and a propensity
to reject lending applications relating to non-standard projects; and (iv) it is
suggested that short-termism is a continuing imperfection within the UK bank finance
market.

7.1.5 The FSB (2002) survey also elicited business owner perspectives with regard
to recent changes in banking provision such as bank closures, reduced choice,
greater bank utilisation of IT and telephone banking and perceived difficulties in
changing banks. A third of respondents felt that bank closures had a negative effect
on their business (5 per cent positive) and 34 per cent felt that less choice of banks
had a negative effect (5 per cent positive). However, 30 per cent felt that IT and
telephone banking positively affected their business, with only 15 per cent feeling that
this had a negative impact. Thirty per cent of respondents felt that the perceived
difficulty in changing banks had a negative effect on their business. Whilst personal
characteristics did not in the main prove to be a distinguishing feature with regard to
the impacts of bank changes, the youngest business owners (those under 21) did
report very high levels of negative effects on their business with regard to bank
branch closures (42 per cent) and less choice of banks (42 per cent).

7.1.6 Further perspectives on the lender-borrower relationship are to be found in the

study for the Scottish Executive (Hamilton et al., 2002) which involved interviews with
both business advisors and bank lenders. The business advisors believed that SME
inability to raise finance is due to a general lack of understanding on the part of both
the borrower and the bank lender. Access to finance was viewed by business
advisors as the main issue with the availability of security, presentation of a business
plan, management experience and ability, growth potential of the sector, bank
lending policies and practices and the impact of bank closures being key factors
impacting on the process.

The bank lender interviews emphasised that lending to SMEs in Scotland is based
upon risk assessment which includes determining whether a potential small business

35
borrower is attempting to proceed on the basis of a viable business proposition.
Security and the bank’s perception of the SME’s management capability are
considered to be very important but a proposition will not receive funding if it is not
felt to be viable, regardless of security levels offered.

7.1.7 A recent study by Wilson et al. (2006) utilises Personal Construct Theory (PCT)
(see 2.5) to examine the perceptions held by bank loan officers of male and female
business owners. The study was undertaken with the support of a major UK clearing
bank, focusing on a sample of 37 new tier business lending officers recruited as part
of the bank’s restructuring programme which had taken place over the previous three
years. The investigation consisted of three stages of data collection. The first stage
involved the bank lending officers describing their reactions to a fictional business
loan application and explaining the criteria they were using and their loan decision. In
the second stage, the lending officers took part in focus discussion groups of lending
criteria and processes. The third stage utilised PCT-based repertory grids, the aim
being to explore how the bank lending officers construed the men and women loan
applicants who they knew both professionally and personally. A rigorous analysis of
the repertory grids utilised content analyses of the constructs and statistical analyses
of numerical measures of the constructs.

Wilson et al. (2006) anticipated that applying this research methodology may reveal
gender-related differences regarding bank lending officers’ perceptions of, and
dealings with, women and men, but relatively few individual gender differences and
no evidence of systematic gender discrimination were revealed.

Of key interest, however, was the unexpected heterogeneity in the personal

constructs held by the business lending officers. Each of the participant lending
officers had been employed by the bank at the same time in the same occupational
position, with broadly similar experience and training. Integral to the training is
emphasis on a guiding framework of ‘5 Cs’ of bank lending: that is to say, the need
for attention in the loan assessment process to character, collateral, capitalisation,
conditions and capacity. However, the constructs which the bank lending officers
identified during the study concentrated predominantly upon ‘character’ and made
little reference to the other four ‘Cs’. These findings suggest that despite a common
base of experience and training amongst the lending officers, they do not seek
common characteristics in loan applicants. A lending officer’s assessment of an
applicant’s loan is influenced by the ways he or she constructs and ranks the
applicant. The study highlights that, if lending officers focus upon the issue of
‘character’ and they hold individualised constructions of what constitutes character,
the assessment of loan applications and decisions deriving from that assessment
may well be based upon the qualitative, subjective and intuitional judgement of an
individual bank lending officer.

Wilson et al. (2006) suggest that their findings may limit confidence as to the even-
handedness of the process and possibly discourage individuals from applying for a
loan. This, they felt, may even go some way toward explaining why women business
owners are less likely to apply for bank finance.

7.1.8 Lane and Quack (2002) in their sociological study of how banks in Britain and
Germany construct and manage risk in relation to small firm lending highlight how
differences in the institutional environment of countries generate significant variation
in the nature of the lender-borrower relationship. The study argues that, overall,
institutional factors make German SMEs less problematic customers than those in
the UK. Within Germany the bank-SME relationship is close with a relatively
symmetric power relationship between SMEs and the banks. The relationship is more

36
stable and not characterised by the high level of discontinuity and change found in
the UK. Moreover, whilst German SMEs tend to be larger than in the UK, German
banks appear to have seized the opportunity to provide accounting and support
services for the SME sector and SMEs themselves carry a higher level of certified
skills than those in Britain. In view of these findings therefore, it is surprising that the
Flash Eurobarometer study (EC 2002), discussed earlier shows that German SME
managers are finding it more difficult than their UK counterparts to access bank
finance.

7.1.9 An EU commissioned study (EU 2002) carried out by the Austrian Institute for
Small Business Research in cooperation with the European Network for SME
Research focused on support provision for small businesses, including financial
services. Although the study is not concerned with access to funding sources as
such, there are a number of parallels between accessing business support services
and accessing funding. Moreover, many firms use business service providers as
intermediaries in gaining access to external funding sources.

First, the study found that the participation rate by European micro, small and sole
proprietor businesses in support services is low. Only 20 per cent of the smallest
enterprises had utilised support services in the past five years and the share declined
with decreasing size of an enterprise. Given that more than three quarters of
enterprises lacked information on the existence and availability of support, there is
likely to be a connection between low level participation rates and a low level of
information on support services offered.

Second, amongst those entrepreneurs that had made some use of support services
over the past five years, many were of the view that service providers did not have an
adequate understanding of the enterprises they were striving to support or the effect
the support had on the business. This raises the issue of the ability of support
organisations to tailor their support to the needs of particular businesses and to
develop a more targeted service.

And thirdly, in terms of the need for financial support services, the study found that
this was higher in disadvantaged areas (defined as having EU Objective One status)
than in non-disadvantaged areas (75 per cent of entrepreneurs expressing a need
compared to 52 per cent). Financial services were, in fact, the support provision in
greatest demand by all businesses irrespective of stage of development: 63 per cent
of start-ups, 65 per cent of growth stage enterprises and 50 per cent of mature
enterprises. However, male entrepreneurs were more likely to express a need for
financial support than female entrepreneurs (62 per cent compared to 49 per cent).

7.1.10 One dimension of the Marlow and Carter (2006) study discussed earlier
focuses on how gender considerations might influence the role of accountants acting
as business advisers to their small firm clients. The findings of this study flag up how
accountants fulfil a valuable role for their small firm clients. The small firm owners
perceived their accountants to be trusted and reliable sources of advice, viewing
them as qualified and knowledgeable professionals who often provided support on an
informal and non-fee paying basis. It appears that compliance demands associated
with the account service provision provide the context which ensures close
interaction between the client and the small firm client and the greater likelihood of
the build up of an enduring trusting relationship.

With regards to the issue of whether the relationship between the accountants and
their small firm clients is influenced by gender considerations, the study points to
women being more likely than men to use other sources of support, including family

37
members and Business Link. Marlow and Carter suggest that women may not
believe that their businesses need the assistance of professional accountants, not
because they would not benefit from the accountant’s advice but because it appears
that women are less likely to believe their type of business would benefit from this
type of support.

From the viewpoint of the bankers, accountants were considered to be an excellent

source of assistance who were well informed about various sources of financing
small firms. The bankers also saw accountants as having a valuable role in
supporting funding applications. There was a high likelihood that applications that
had been prepared with help from accountants would be realistic and be easier to
assess due to sound, appropriate presentation. One corollary of this is a partial
addressing of constraints associated with asymmetric information issues.

8. MANAGEMENT ABILITIES AND ACCESS TO EXTERNAL FINANCE:

PERCEPTIONS AND REALITY

Overview

This section considers the extent to which perceived difficulties in accessing finance
are related to other abilities and motives of‘ ‘ would-be’ and existing entrepreneurs.
Entrepreneur perceptions as to their ability to confidently interact with financial
providers and to prepare and provide adequate documentation are a potential
constraint, with some individuals underestimating their financial capabilities. There is
thus potential for confidence building action by the banks and support providers.
A number of studies have highlighted low levels of financial literacy, which appear to
be most commonly found amongst women entrepreneurs, those from various ethnic
minority groups, and those with lower levels of educational attainment. Some existing
entrepreneurs struggle with basic business and financial terminology. Other studies
have found low levels of financial literacy (compared to their scientific and
technological skills) amongst the founders of high-tech businesses.

Educational attainment and background are key determinants with regard to start-up
propensity and success in accessing finance. There is also quantitative evidence
based on a large scale survey of existing SMEs to show the difference that having
someone with financial qualifications adds to the chances of success in accessing
finance. The motives for starting a business have also been found to make a
difference, with those with high expectations (i.e. the more ambitious entrepreneurs)
having greater confidence in approaching external financial sources than those with
low expectations (i.e. reluctant entrepreneurs).

8.1 Entrepreneur perceptions relating to ability

8.1.1 ‘The 2004 UK Survey of SME Finances’ (Fraser 2005) found that a large
majority of SMEs did not employ a qualified individual to manage their finances and
that, compared to other aspects of running the business, confidence in dealing with
financial issues was not high. Integral here are issues of the entrepreneur’s
perception of their ability with regard, for example, to effectively and confidently
interfacing with financial providers, including their ability to research and prepare
formal applications for finance and to present themselves credibly to the provider,
thereby enhancing their access to finance.

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8.1.2 That some small business owner managers do recognise the value of
additional management capability and external expertise is demonstrated in a study
of small firms in Sweden (Cressy and Olofsson 1997). The study highlights that,
whilst some small businesses were aware that relinquishing a degree of control can
improve firm performance, the resultant profits and business growth may not be
perceived as sufficient to compensate for loss of control. However, one in three
younger firms, particularly those in the business services sector, were found to be
very receptive to the additional management expertise that equity holders can bring
and actively sought such ownership. The study therefore suggests that small
business owners should view equity finance as a ‘package’ with transfer of
management skills from finance providers such as business angels compensating for
any loss of control.

8.1.3 As already discussed earlier in this report, some ‘would-be’ entrepreneurs

appear to underestimate their financial capabilities (Jones and Tollos 2002),
suggesting that low entrepreneurial confidence levels could be bolstered as a key
input to enhancing financial ability and awareness. This is a key issue since Fraser
(2005) suggests that having someone with a financial qualification in charge of
finances reduces the likelihood of rejection of a finance application by over three
percentage points and having low self-confidence with regard to dealing with financial
issues increases the likelihood of rejection by the same amount. Thus, by implication,
boosting the confidence and fostering financial aptitude in nascent entrepreneurs,
given the unlikelihood of their being able to employ a qualified individual, is a crucial
factor in improving access to finance.

8.1.4 The issue of financial confidence, awareness and aptitude is of specific

relevance to those within disadvantaged areas who are considering starting a
business. As revealed earlier (section 4.1), many individuals in these areas who are
at early stages of adulthood feel poorly equipped to understand and deal with
financial matters (Collard et al 2001). Moreover, there is some evidence that ethnic
minority businesses are more likely to have loan applications rejected than white-
owned businesses (Fraser 2005), suggesting that financial confidence and capability
are likely to be significant pre-requisites in facilitating effective interaction with finance
providers.

8.2 Evidence of inadequate financial management ability

8.2.1 A particular problem affecting perception which was flagged up by the Bank of
England (2000) is financial literacy. Citing Kempson and Whiley (2000), the study
found that as many as one in six individuals were deterred from using a bank account
following the experience of financing difficulties, which in turn impacted upon the
business and/or the ability to raise finance. Moreover, given that a lack of
understanding or a suspicion of the banking sector can affect demand for, or access
to, finance, the build-up of basic financial literacy is seen as a potential confidence
builder in enhancing dealings with the bank. This points to the importance of
entrepreneurs’ drawing upon expert advice and assistance to improve financial
literacy.

8.2.2 It was found when undertaking the Scottish Executive (Hamilton et al. 2002)
study (discussed above), that the actual process of administering the questionnaire
provided evidence of inadequate levels of financial literacy amongst SME owner
managers. Although respondents were given assistance in understanding the
questions asked, a number of them queried the use of some terminology in the

39
questionnaire. Understanding common business terminology and basic financial
terms is problematic for the managers of some SMEs and difficulties of interpretation
may act as barriers to the access of finance.

8.2.3 The issue of financial literacy and capability is emphasised in an OECD study
on the financing of innovative start-ups (OECD 2004). The high-risk nature of many
innovative start-ups and micro-enterprises, their early orientation to intangible assets
and negative earnings can result in them facing tight external financing constraints,
partly due to the greater significance of information asymmetries. The banks’ task of
effectively assessing the creditworthiness of such start-ups or micro-enterprises thus
becomes more difficult, and felt to be further impaired by inadequate business plans
and financial statements on the part of the would-be entrepreneur.

8.2.4 The Bank of England (1996) study into the problems experienced by
technology-based firms in accessing finance included emphasis on the lack of
management capability, especially at start-up. Other difficulties included the high cost
of due diligence and a lack of familiarity of providers of finance with regard to
technologies being utilised. The report incorporated analysis of sources of finance for
UK and overseas technology-based firms and the results of 60 technology-based
firms case studies produced by the Bank’s regional agents. Recommendations
included actions to attempt to enhance management skills of technology
entrepreneurs and the encouragement of banks to develop finance packages for
technology-based firms.

8.3 Potential impact of background and educational achievement

8.3.1 Using data from the 1998 US Survey of Small Business Finances, Coleman
(2004) attempted to determine whether educational attainment has an impact on
access to capital for women- and minority-owned businesses. Firms owned by white
males served as the reference group for comparison with white women, black men,
Hispanic men and Asian men. Using univariate analysis, the study found that firms
owned by black, Hispanic and Asian men were significantly more likely than white
men to have been denied a loan on their most recent request. Black men and white
women were significantly more likely not to apply for loans because they assumed
they would be denied. The study also found a relationship between educational level
and non-applications and loan denials. The more highly educated were less likely to
be turned down for loans. The less educated were more likely not to apply, based on
the assumption that they would be turned down.

Interestingly, multivariate analysis showed that owners having higher levels of

education were less likely to have applied for a loan in the previous three years. It
was felt that this may be due to a possible linkage between educated individuals and
their ability to manage more profitable businesses, with retained earnings replacing
the need for external funds.

8.3.2 The 2005 GEM study on high expectations entrepreneurship (Autio 2005)
highlights how ‘high expectations entrepreneurs’ differ from ‘low expectation
entrepreneurs’ in terms of their entrepreneurial activities and attitudes. The study
looked at high expectation activity in nascent entrepreneurs (i.e. individuals who are
actively trying to start a new firm, but who have not done so yet) and new business
managers (i.e. owner managers of an entrepreneurial firm which is younger than 42
months old). The investigation found that high expectations entrepreneurs (all
nascent entrepreneurs and new businesses which expect to employ at least 20
employees in 5 years time) were significantly more likely to perceive good business

40
opportunities, more likely to expect to start a business within three years, more likely
to know people who have started a business and almost twice as likely to have
invested in entrepreneurial ventures started by others.

As suggested by Personal Construct Theory (see 2.5), an individual’s past

experiences and development activities influence his or her perceptions and
perspectives. High expectations entrepreneurs were found to be influenced by
exposure to other entrepreneurs, informal investor activity and greater
entrepreneurial activity in general. They were more likely to believe they have the
necessary skills to start a new business, were more driven by opportunity motivation
(rather than necessity motivation) and were less likely to be constrained by fear of
failure. The GEM study (Autio 2005) highlights how it is entrepreneurial attitudes and
beliefs or objectively observable demographic differences such as gender, age,
education or income that distinguish high from low expectation entrepreneurs, with
income, education and opportunity motivation the greatest differences. It can be
argued that such insights shed light on why many individuals with limited experience
and low levels of educational achievement perceive access to finance to be a
potential constraint on their effective start-up of a new venture. It also suggests, in
some instances, their perception may be well-founded because of the
insurmountable problems they would face. For others, on the other hand, their
perception may be ill-founded in that, given the potential viability of their business
idea, the bank may be offering a reality which is contrary to the individuals
perceptions of it.

9. WHERE ARE THE GAPS IN THE CURRENT KNOWLEDGE BASE AND WHAT
RESEARCH IS NEEDED?

At best, the existing evidence base that has been reviewed for this study portrays a
partial understanding of perceived difficulties relating to access to finance and the
discouraging impact on ‘would-be’ and existing entrepreneurs. Whilst
entrepreneurship and enterprise start-up and development has attracted a great deal
of research attention in recent years, the question of how ‘would-be’ and existing
entrepreneurs perceive the process of accessing finance is little researched. This
review has not identified any evidence which enables us to assess with any real
confidence the scale and extent of the problem, particularly amongst pre-start and
start-up enterprises, since there haven’t been any large-scale ‘scientific’ surveys
which have tackled this issue head on. Some valuable insights are revealed in
some areas of the literature-base but the studies are of variable scope and quality,
many of them relying to a great extent upon anecdotal evidence or qualitative
insights drawn from a limited number of case studies or focus group evidence.

The review has identified a number of areas that would benefit from more research,
focused more explicitly on the perceived difficulties that ‘would-be’ and existing
entrepreneurs experience than has been the case in previous research. The
following are a number of areas where, in our view, more research is needed.

9.1 Female Entrepreneurs

There is a need for greater understanding surrounding the effects of gender on

access to finance. In particular, there is a need for rigorous survey evidence to
confirm emerging insights as to why finance remains a problem for many ‘would-be’
and existing women entrepreneurs. Carter et al (2006) highlight how utilisation of a

41
narrow set of research approaches that often rely upon self reported evidence of
entrepreneurs lack the rigour and sophistication necessary to identify and investigate
the key issues. This, they emphasise, includes a real need to study the perspective
of both the supply-side and the demand-side by giving equal focus to banks and to
the female ‘would-be’ and existing entrepreneur. An Industry Canada (2005) gap
analysis on research on SME financing for women confirms that, whilst a significant
amount of investigation has been conducted over the past 10 years or so on the
effects of gender on SME access to finance, there remains a lack of rigorous
research on the key issues surrounding the phenomenon. For example, as indicated
by several of the studies included in this review, the reluctance of many female
entrepreneurs to apply for external finance is closely bound up with their motives for
running a business, other non-business commitments, and the very nature of the
enterprise itself. Given these contexts, the perceptions that many women
entrepreneurs have about external sources of funding may appear to be well
founded, but more systematic research is needed to address these questions.

Proposed methodologies:

(a) Rigorous surveys of female ‘would-be’ and existing entrepreneurs to

assess to what extent there are perceived (as opposed to actual)
difficulties of accessing finance, to identify the key factors and issues that
contribute to these perceived difficulties, and to consider the demand and
supply-side implications.

(b) Follow-up, in depth case study investigations of female entrepreneurs

identified in the survey, where perceived difficulties in accessing finance
have been particularly apparent, to help understand the nature and
interaction between different influences and contextual factors, and the
female entrepreneurs’ perceptions of alternative sources of finance.

(c) A series of supply-side interviews with bank lenders and other finance
providers to obtain their perspectives on the reasons for the difficulties in
accessing finance faced by some female ‘would be’ and existing
entrepreneurs and their views as to how these might be addressed and
overcome, including possible actions that they are already taking.

9.2 Disadvantaged Areas and Communities

There is evidence from various studies that there are individuals located in deprived
communities who have potentially viable business ideas, or who are currently running
marginal businesses that have the potential to become ‘bankable businesses’. A
lack of confidence and/or financial literacy, suspicion of mainstream lending sources,
and lack of engagement with appropriate social networks have been put forward as
reasons for not accessing external sources, although there is as yet no reliable
evidence to assess the relative importance of these factors. It is also difficult to know
the extent to which potential entrepreneurs from these communities are unable to
fully exploit opportunities to develop their businesses because their perceptions are
well-founded (i.e. based on an accurate assessment of their prospects) or ill-founded
(i.e. based on misunderstandings or misinformation). There is a need therefore for
more rigorous research to reveal a more detailed understanding of key issues such
as:
o How severe is the issue of lack of confidence and financial
illiteracy? What actions are required to address low confidence in
would-be entrepreneurs in deprived communities?

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 o What is required to change perceptions with regard to mistrust and
suspicion of formal institutions?

Proposed methodologies:

(a) Surveys of ‘would-be’ and existing BME entrepreneurs aimed at

assessing the relative importance of various factors that influence their
perceptions of alternative funding sources and their perceived
difficulties in accessing funding. Some further analysis of existing
survey data sets (e.g. the SBS’s BMEB booster survey) may yield
useful insights here.

(b) Qualitative in-depth interviews with support providers (including

community leaders, BME business advisors, members of the ethnic
business forum) and lenders to help understand the nature of the
difficulties and what actions can be taken to overcome them.

o To what extent do banks really understand the problem contexts

and difficulties impacting upon ‘would-be’ entrepreneurs in
disadvantaged areas/communities?
o How can the ‘would-be’ and existing entrepreneur/bank
relationship be enhanced within disadvantaged areas/communities
in order to foster more ‘bankable’ businesses?

Proposed methodologies
:
(a) Qualitative study of bank managers and bank lending officers,
including rigorous Personal Construct Theory based examination of
perceptions and factors influencing perceptions.

(b) Interviews (or focus groups) with intermediary organisations providing

support to BME entrepreneurs to consider the nature of and
improvements to the relationships between entrepreneurs and
lenders.

9.3 Bootstrapping

The review has uncovered a lot of evidence that informal modes of bootstrapping
are increasingly being used at both the start-up stage and during the enterprise
development process. Little of this evidence, however, is based upon in-depth
studies of bootstrapping methods; for example, current understanding with
regard to the use of credit cards either tends to build out of wider survey
investigations aimed at broader issues of small business finance or relies on
rather anecdotal evidence which makes sweeping claims as to start-up utilisation
of credit card financing. Key issues requiring more detailed research attention
include:

o To what extent individuals are aware of, and understand that,

certain modes of bootstrapping finance, if used appropriately, are
an effective complementary form of finance?
o Who uses credit card finance and under what circumstances; and
what forms of bootstrapping are most frequently used?

43
 o What do ‘would-be’ entrepreneurs perceive as the benefits of this
type of finance compared to more traditional forms?
o To what extent are new business starts ‘kick-started’ by use of
credit card or other informal bootstrapping finance?
o To what extent is bootstrapping used as a carefully considered
financing strategy to complement traditional sources of finance or
is it frequently used as a ‘last resort’ strategy when a business is in
financial difficulties?

Proposed methodologies:

(a) To provide systematically produced quantitative evidence, future SBS

entrepreneurship and small business surveys might include questions
on the types of bootstrapping methods of finance used, the motives for
using them, and how they compare to the use of other methods of
finance.

(b) More qualitative research, based on a series of case studies with new
and existing small enterprises involved in different product/service
markets, to help understand the perceived advantages of
bootstrapping sources of finance compared with more formal sources,
its role in the start-up process, and the identification of the kinds of
critical development incidents/situations that are most likely to result in
the use of bootstrapping credit card finance.

9.4 The Emergence of New Business Models

A significant issue that has come to the fore during the course of this review is
the implications of the changing nature of what constitutes much new and
emerging small business activity. For example, the growth of internet based,
knowledge based, and ‘creative’ businesses brings with it the development of
business models that are a far cry from the traditional business forms that
finance providers are used to dealing with. Such business models can be
short-lived and highly flexible, based around short-term one-off projects. They
may be home-based and/or built upon intangible, skill-set asset bases. It is
likely that the entrepreneurs who set up and drive these businesses have
distinctive resourcing needs and view the entrepreneurship and integral
financing process from a different perspective to more conventional
businesses. They are therefore likely to hold different and possibly somewhat
negative perceptions of many of the stakeholders, including banks, that
constitute their business environment. If the initiation and development of
such new business models are to be effectively nurtured and supported, there
is a need for further research investigation to reveal a deeper understanding
of these entrepreneurs, their financial needs, and their perceptions of the
appropriateness of existing funding sources.

Proposed methodology:

Qualitative research, ideally focused on a small sample of case study

entrepreneurs operating new business models in emerging sectors, to
enhance contextual understanding of the entrepreneur, the business form,
their financing needs and the strengths and deficiencies of traditional modes
of financing in this context

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9.5 Use of External Assistance

Whilst it can be argued that it is not a central role of finance providers to offer
support to ‘would-be’ or existing entrepreneurs, there is evidence that issues of
low confidence levels and financial awareness capability constrain start-up and
enterprise development, and that, for some individuals at least, this manifests
itself in terms of negative perceptions of finance providers and the funding
process. To a certain extent, the banks have already ‘grasped the nettle’ with
regard to the issue of financial literacy, through provision of and involvement in
support programmes in the education system and the entrepreneurship process
(Bank of England 2000). The phenomenon of business support provision, and the
ways in which finance providers can more effectively participate in that support
process would benefit from greater depth of understanding of key issues
surrounding external support, including:

o What are the main barriers to ‘would-be’ entrepreneurs and existing

entrepreneurs’ take up of external support which will enhance financial
and business capability and build confidence? More understanding is
required of the reasons why ‘would-be’ and existing entrepreneurs
avoid, or are reluctant to utilise, external support, especially given the
potential this offers for more effectively accessing external finance
(such as help with business plans) and/or developing financial
awareness capability and business skills.

Proposed methodology:

The inclusion of questions in future SBS surveys of entrepreneurs and small

businesses to determine constraints to the take-up of training and other
support provision.

o To what extent do finance providers offer the kind of assistance that

‘would-be’ entrepreneurs and existing entrepreneurs need? For
example, is there opportunity to enhance existing forms of and
approaches to support through ‘packaged assistance’ in a way that
would increase ‘would-be’ entrepreneur confidence and improve
financial literacy? To what extent do providers understand the small
business opportunity and development context?

Proposed methodologies:

(a) Training needs survey of quota samples (based on gender, ethnicity,

age etc) of ‘would-be’ and existing entrepreneurs.

(b) Qualitative investigation of banks as to current levels of understanding

of small business problem, opportunity and development contexts.

(c) Evaluation of existing areas of support provision to determine whether

‘content’ and ‘delivery process’ meet entrepreneur needs and facilitate
potential areas for improvement

45
 o Could more participative banking relationships effectively address
some of the issues associated with information asymmetry? Integral to
the enhanced provision of a ‘package’ of support that the banks might
offer to small businesses (advice, consultancy, financial literacy
training) is the issue of interaction and coordination between banks,
other support providers and SMEs.

Proposed methodologies:

The Identification of ‘best small business/banks relationship practice’ through:

(a) Literature review regarding ‘best international practice’.

(b) Case studies of current UK best practice – incorporating examples of best

bank/ small business relationship practices and case studies which facilitate
consideration of weaknesses and deficiencies in the demand and supply
sides of the banking relationship.

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