The Funding Gap

.. re prevalent in the USA than in the UK. These business angels are specific individuals who wish to become involved in the financing of higher risk projects. They are usually motivaed by a desire for some form of control and profit in return for fin cing the firm.

It is bellieved their are 18,000 business angels in the uk offering 500 million annunally.10 Banks Debt finance is the traditional route for sme of external finance with overdrafts and loans as their main tools.Despite their decline in recent years the still play the largest role. The banks characteristics have changed considerably in the 1990s. K changes include shift towards technology orientated banking delivery systems ie internet and phone banking. Trade credit, asset based and receivables finance play an big role. Factoring has doubled between 1991 -1999.

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11 The structure of bank lending has also shifted, away from short-term variable-rate lending and towards more term finance.The ratio of overdraft to term lending has fallen significantly, from 49:51 in 1992 to 31:69 in 1998, and fixed-rate lending has ri n from 28% to 33% of term lending since 1996. See chart below.

This has addressed one of the problems highlighted by the early 1990s recession small firms over-reliance on the overdraft facility to finance anything from working capital to long-term in stment projectsand has reduced the vulnerability of small firms to the economic cycle. Banking and Finance Issues Source: DTI Website Biliography Books Small Business Guide Lloyods Bank By Sara Williams. 1996 Edition, Penguin Books.Chapter 5 Financial Preparation And Control. pages 268 – 334. Innovation and Entrepreneurship by Peter Drucker Butterworth-Heinemann. 1995 Chapter 15 The New Venture, pages 172 – 191 & Chapter 16, Fustest with the Mostest pages 193 – 203. An Introduction to Strategic Financial Management by David Allen.

Kogan Page Publishing.1997 Chapter 2 Finanical management pages 27 -38. Paths of Enterprise – The future of Small Business By J Curran & R Blackman. Routledge Publishing. 1991 Chapter 8 – Small businesses and thier banks in the year 2000 pages 149 – 163. Small Business and Entrepreneurship, Second Edition by P Burns & J Dewhurst. Macmillian Press.

1996. Chapters 7 Venture Capital pages 131 -166. Chapter 8 Franishing pages 166 – 180. Handbook of Entrepreneurship Edited by D. Sexton & H. Landstrom.Blackwell Press. 2000.

Part 111 Financing Growth, pages 195 – 283. Websites www.venturesite. www.bvca. wwwfinanceforbuisiness www.

uk Newspapers Sunday Times 22nd October. Financial Section – Article Small Business suffers from red tape.

page 3 Guardian Thursday 12 October Money Section – Interest rates affect business page 21 Reports Bank of England Report on Financing for Small Firms year pages etc. Barriers to growth Section 3 This section looks at whether relevant organisations have been useful in reducning the funding gap? In general SMEs have become markedly become less dependent on external finance. Recently published research has shown that only 39% of small businesse sought external financing of any kind between 199597, compared with 65% between 198790. 12 Listed below are bullet points of the usefullness of the relevant organisations. Business start-ups rose rapidly in the 1980s, as a result of a combination of government schemes and deregulation of credit controls.

Small businesses are now more appropriately financed than in the 1980s, using a wider range of financing sources. Th are no longer so dependent on overdraft financing, and rely more on committed funds, with fixed repayments. Individual small business banking codes of practice have lead to a open, two-way relationship between banks and small businesses.

This has benefited small businessesresearch by the Forum of Private Business13 shows that SMEs that had developed a more ticipative relationship with banks were obtaining lower charges and collateral requirements. Banks now have better warning systems in place to detect at an early stage whether businesses are encountering trading difficulties. Small firms are more prepared to share information with their banks.Better relations and a greater degree of co-operati should help to avoid some of the strains of the previous recession, which contributed to increased business failures and seriously affected the reputation of the banks. Small firms are now assisted by a wider network of training and support agencies, such as Business Links, TECs and Chambers of Commerce. The providers of bank finance to small businesses operate in a concentrated industry. The four main English clearing banks account for 84% of the market, with NatWest and Barclays together accounting for 48% of the total (see Chart below).

However, tho h the overall market share of the Big Four has remained fairly stable, the market shares of the individual clearing banks have changed significantly over the 1990s: NatWest and Barclays have lost market share to Lloyds-TSB and, to a lesser extent, Midla . This trend is even clearer in market shares of lending to finance start-ups.With fierce competition for lending funds the customer ie the sme can only benefit. Source: Bank of England Website. Venture capital looks set to remain stable with little growth. . Some recent research 14 suggests that UKentrepreneurs establish their own businesses partly because of a desire for independence.This contrasts with a more overt wealth-creation motive i he United States, and the desire for expansion in Europe.

This attitude was highlighted in a survey carried out by the British Chambers of Commerce, 15 which reported that only one third of UK businesses were prepared even to consider using external eq y finance. Research by Manchester Business School on private companies showed that the desire to maintain ownership is particularly evident among family-owned businesses ( See chart below) These figures provide some support to the pecking-order hypothe s of finance16 .According to this, equity finance tends only be sought when internal resources and debt finance have been exhausted (perhaps leading to over-gearing). At this point, businesses will decide whether they would rather remain at their curr size and maintain complete ownership, or give up a degree of ownership in return for further growth.

Source: The financial Affaiors of Private Companies, Manchester Business School 1998 Business angels are also failrly small scale in the UK.The main barrier to business angel investment, which applies to all firms, is the lack of information on investment opportunities. Business angels operate most effectively through local networks ( geographical considerations are important), and adopt a hands-on approach to their investment, offering the benefit of their expertise as well as their financial commitment. However, some locally based business angel networks cannot achieve sufficient itical mass to become viable. Conclusions The article examined how the patterns of small firms financing have changed over the past decade, .

It was noted that small businesses are now more appropriately financed than in the early 1990s. They are more dependent on internal sources of financewith many of the smallest businesses being net creditors to the banking sectorand businesses that do require external finance now use a wider range of finance products. Traditional bank finance does, however, remain the most important source of external finance for small businesses.Market competition in the provision of finance to small firms was identified as a means of facilitating and maintaining the momentum for improvement. The providers of bank finance to small businesses operate in a concentrated industry, but the degree of competition in this market is increasing, because of technological changes and new entrants.

One area where improvement in the provision of finance is less evident is in the supply of risk capital for technology-based small firms. Problems appear to arise at the start-up stage, where supplies of seedcorn and early-stage equity finance are limited. Many formal venture capital firms tend not to invest in small enough amounts for these companies, and the informal venture capital market (business angels) is still underdeveloped compared with that in the United States.