Is there a debt finance gap relating to Scottish SMEs? A demand-side perspective

This paper investigates whether or not there is evidence of market failure in the provision of bank finance to Scaottish SMEs. The key question is whether SMEs have been experiencing difficulties because of the unsuitability of the business case they were putting to the banks or becasue of sub-optimal lending practices. The paper draws upon evidence from the 2006 Annual Small Business Survey (Scotland) based on a survey of 1014 Scottish SMEs and a follow-up in-depth survey of 39 SMEs that had reported problems in accessing bank finance. While the findings show that less than one-fifth of the firms trying to access bank finance encoutered problems and that only a small minority had to abandon their manufacturing SMEs were disproportionately likely to experience problems.These were largely attributed by owner-managers to their lack of a track recrod of ebt management in the case of young businesses and difficulaties of providing the necessary collateral in the case of manufacturing SMEs. The risks associated with projects involving product and market diversification was also a factor. The paper concludes that these funding gaps are likely tohave become larger since 2007 as as result of the credit crunch.