SMEs’ Access to Finance: Is there still a debt finance gap?

There is evidence that some SMEs may still face difficulties in accessing bank finance from lenders (CEEDR, 2007). This paper reports an in-depth study into demand and supply side issues relating to access to bank finance by Scottish SMEs and whether there is still market failure associated with good, bankable business cases from SMEs that do not receive finance. We argue that our study utilises innovative methodology and is relatively rare as a robust study in this area. We combine demand side in depth survey analysis of SMEs with supply side analysis by bank managers of real business propositions through verbal protocol analysis.

This paper discusses the ability of SMEs to access debt finance from the commercial banks in Scotland, it reports findings from a survey of 51 SMEs that had reported having difficulty raising finance and from interviews with bank managers utilising verbal protocol analysis with validated real SME business proposals to give insights into the decision-making of bank managers in the processing of proposals from SMEs. Theoretically, there are categories of SMEs that may face greater difficulties or contain circumstances in which it is more difficult for bank managers to apply standard decision-making models and these categories are explored to provide a theoretical framework for the investigation. The theoretical framework provides themes for discussion of the findings. These include for example; younger SMEs and owners, rural-based SMEs and manufacturing SMEs. Bank officers were found to follow standard financial models, although considerable discretion could be exercised by senior bank managers often leading to a heavy reliance on personal relationships. Smaller and newer SMEs where discretion was more limited were more likely to face difficulties. The study revealed a number of categories of SMEs that face difficulties, including strong growth SMEs in rural environments, new and young SMES, young entrepreneurs seeking start-up finance and manufacturing SMEs seeking to diversify and finance new product development.

Focusing on these categories of SMEs, we analyse survey evidence, in depth case studies and verbal protocol analysis with bank managers to discuss research questions on whether informational effects can lead to market failure in the provision of debt finance, the circumstances in which sound propositions are turned down and whether such circumstances can be prevented. This forms the basis for development of conclusions on the continued existence of a debt gap for certain categories of SMEs and some policy implications.