The Impact of Perceived Access to Finance Difficulties on the Demand for External Finance-UK-2007

8/14/2019 The Impact of Perceived Access to Finance Difficulties on the Demand for External Finance-UK-2007

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URN 07/1315

Literature Review for the Small Business Service

The Impact of Perceived Access to Finance Difficultieson the Demand for External Finance

Final ReportJanuary 2007

Centre for Enterprise and Economic Development ResearchMiddlesex UniversityThe BurroughsLondon NW4 4BT

Research Team

Dr Peter Wyer, CEEDRDr Ignatius Ekanem, CEEDRProfessor David North, CEEDRProfessor David Deakins, University of Paisley


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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 INACCESSING 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 TOALTERNATIVE METHODS OF RAISING EXTERNAL FINANCING .............23

6.1 Studies covering a range of sources ................................................................................................24

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

6.3 Bootstrapping .......................................................................................................................... ........ .30


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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 ANDWHAT RESEARCH IS NEEDED? .................................................................. 41

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EXECUTIVE SUMMARY

1. Introduction

The purpose of this review is to investigate the extent to which perceiveddifficulties concerning access to finance discourage potential and existingentrepreneurs from demanding external finance. It focuses on evidencerelating to the barriers to accessing finance that can arise because of theperceptions that would-be and existing entrepreneurs have regarding theirchances of success in applying for external finance, the process involved inobtaining it, and the various costs to them and their business of beingsuccessful.

The review has had the following aims: (i) to provide a comprehensiveoverview of the existing research literature and understanding of the statusquo relating to the perceived difficulties of accessing finance; (ii) to identify

key policy relevant issues; and (iii) to outline future research and policyagendas.

The review encompassed theoretical writings on the subject, empirical workincluding quantitative survey methods as well as qualitative research basedon case studies, and various data sources/sets which are likely to repayfurther analysis. As well as drawing upon relevant research evidence fromthe UK, the review has also used literature relating to a number of developedeconomies, notably the USA, Canada, Scandinavia, and other EuropeanUnion countries.

2. Theoretical Perspectives

The assumptions of much traditional financing theory do not address many ofthe constraints and difficulties faced by would-be entrepreneurs and smallbusiness owner managers in accessing finance. Several other theoreticalperspectives are considered to be more helpful in this respect, drawing uponconcepts in other disciplines such as organisational behaviour and socialpsychology.

Five interrelated perspectives are reviewed:

(i) a systems perspective which demonstrates the need to look atfinancial issues within the broader internal and external operatingcontexts;

(ii) social network theory which draws attention to the importance ofthe entrepreneurs social relations and networks;

(iii) the pecking order hypothesis relating to entrepreneurs perceptionsof alternative financial sources;

(iv) theories of financial intermediation that contribute tounderstanding the nature of lender-borrower relationships;

(v) personal construct theory which focuses on entrepreneursperceptions of different aspects of the world in which they operateand 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 thewould-be or existing entrepreneurs understanding of something. Withregards to entrepreneurs perceptions of difficulties in accessing finance, it is

important to recognise that an individual may adjust their personal constructsand thus their perceptions, beliefs and expectations in the face of newexperiences.

4. Locating the Problem

Although the question of how would-be and existing entrepreneurs perceivethe process of accessing finance is rarely tackled directly in the numerousrecent studies of enterprise and entrepreneurship in deprived areas andcommunities, they do provide some useful insights into the nature of theanticipated and actual difficulties experienced.

The evidence indicates various cultural influences on the perception of Black& Minority Ethnic Business (BMEB) entrepreneurs, there being a commonlyheld expectation amongst certain ethnic groups that they will be treatedadversely, particularly by commercial banks.

A number of studies indicate that entrepreneurs living in deprived areasperceive themselves to be disadvantaged in obtaining bank finance becauseof a lack of collateral, arising from low property values or a dependence onrented 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 particularlyimportant and here there are recent and current studies that provideparticularly helpful insights.

The issue of low confidence levels amongst female would-be and existingentrepreneurs surfaces in several studies, leading to negative perceptionsabout their chances of success in applying for external funding.

Some evidence suggests that womens perceptions are influenced by thetype 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. theyfavour part-time, flexible working). For these reasons they may be reluctantto enter into long-term financial commitments.

Recent evidence indicates that younger would-be entrepreneurs arereluctant to take on more debts until they have cleared their student loans,with concerns about the implications of the rising cost of higher education forthe 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 whichthey can access different sources of finance.

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Numerous authors have emphasised the importance of social networking tolearning about how to run a successful business, including overcomingbarriers to financing.

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

6. Entrepreneur Perception and Awareness with regard to AlternativeMethods of raising External Finance

It is difficult to obtain a coherent picture of entrepreneurs perceptions ofalternative methods of raising external finance as the existing literature covers

a range of different national and regional contexts as well as reflectingdifferent research methodologies.

Various large-scale surveys tend to confirm the pecking order hypothesis inshowing that at pre-start and start-up, entrepreneurs have a strongpreference for using personal and informal sources of finance and that theuse of external debt finance (particularly bank overdrafts) becomes morecommon 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 potentialentrepreneurs from lower socio-economic groups, whilst dissatisfaction withbank finance is greatest amongst those running the youngest and smallestenterprises and also amongst the youngest entrepreneurs.

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

A number of studies draw attention to the increasing preference ofentrepreneurs at all stages of enterprise development for variousbootstrapping methods of financing, one of the most commonly used beingpersonal and business credit cards. The ease of accessing un-securedcapital and flexibility are perceived as the main advantages over otherexternal sources of finance.

7. The Lender-Borrower Relationship

There are relatively few studies that address this issue head on but it ispossible to glean some insights from studies that are concerned with other

aspects of the lender-borrower relationship.

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EU evidence indicates that UK SMEs not only find it easier to access financethan do their counterparts in many other European countries, but also thatthis 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 thebank and small business borrowers, the negative perception effects beinggreatest in the case of young firms. The rationalisation of banking provision isseen by some authors as compounding problems of information asymmetryfor small businesses.

There is recent evidence to show that business lending officers, despiteundergoing similar training on the application of decision criteria, tend inpractice to place greater emphasis upon the personal characteristics of theentrepreneur, resulting in concerns about a lack of even handedness and itsadverse impact on the perceptions of entrepreneurs.

More positive perceptions of banks by small business owners tend to beunderpinned by more participative relationships and research has shown thecrucial role that accountants can play here, as trusted actors by both thebanks and entrepreneurs.

8. Management Abilities and Access to External Finance

There is agreement in the literature that many entrepreneurs are put at adisadvantage in accessing external finance as a result of their low levels ofconfidence 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, thosefrom various ethnic minority groups, and those with lower levels ofeducational attainment. Other studies have found low levels of financialliteracy (compared to their scientific and technological skills) amongst thefounders of high-tech businesses.

There is quantitative evidence based on a large scale survey of existingSMEs to show the difference that having someone with financial qualificationsadds to the chances of success in accessing finance.

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

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

The existing evidence base portrays a partial and fragmented understandingof 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 toassess 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 surveyevidence to confirm emerging insights as to why finance remains aproblem for many would-be and existing women entrepreneurs aswell as for more detailed qualitative research that accommodatesboth the demand and supply perspectives. This also needs torelate to the issues of motives and business type.

(ii) Disadvantaged areas and communities there is a need for moreresearch to gauge the extent to which potential entrepreneurs fromthese 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 variousinformal methods, including the growing use of credit cards, tofinance business start-up and what would-be entrepreneursperceive as the benefits of this type of finance compared to moretraditional forms.

(iv) The Emergence of New Business Models a significant issue isthe implications of the changing nature of what constitutes muchnew and emerging small business activity, such as the growth ofinternet and knowledge based businesses, for external fundingprovision. A deeper understanding is required of these newentrepreneurs, their financial needs, and their perceptions of theappropriateness of existing funding sources.

(v) Use of External Assistance further research is needed into therelationship between external support provision and access tofinance, 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 moreparticipative banking relationships in addressing issues ofinformation asymmetry.

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1. INTRODUCTION

The purpose of this review is to investigate the extent to which perceived difficultiesconcerning access to finance discourage potential and existing entrepreneurs fromdemanding external finance. It focuses on evidence relating to the barriers toaccessing finance that can arise because of the perceptions that would-be andexisting entrepreneurs have regarding their chances of success in applying forexternal finance, the process involved in obtaining it, and the various costs to themand their business of being successful. As such, the focus of the review is onevidence relating to those entrepreneurs and business owners who have perceptionsand 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 withthe Small Business Investment Taskforce (SBIT), is to investigate the extent to whichperceived difficulties concerning access to finance discourage potential and existingentrepreneurs from demanding external finance. It focuses on evidence relating tothe barriers to accessing finance that can arise because of the perceptions thatwould-be and existing entrepreneurs have regarding their chances of success inapplying for external finance, the process involved in obtaining it, and the variouscosts to them and their business of being successful. As such, the focus of thereview is on evidence relating to those entrepreneurs and business owners who haveperceptions and attitudes that prevent them from applying for external finance.

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

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1.2 Approach

The approach to this review has involved an initial scoping exercise to clarify thespecific issues to be addressed and criteria for selecting the literature base.Relevant literature (government/policy related as well as academic) has beenidentified through scanning relevant journals, web sites of researchorganisations and government departments, and conducting key word searchesof electronic databases using relevant search engines. The searchencompassed theoretical writings on the subject, empirical work includingquantitative survey methods as well as qualitative research based on casestudies, 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 whichidentified the key themes and questions to be addressed by the review. As wellas drawing upon relevant research evidence from the UK, the review has alsoused 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 followingsection, section 2, outlines a number of relevant theoretical perspectives whichare considered to be useful in interpreting the findings of the subsequentempirical studies. Section 3 considers the meaning of perception that isappropriate to the review. Section 4 is concerned with evidence which helpsanswer the question of where the problem of perceived difficulties inaccessing finance is most often found and focuses particularly on deprivedareas and communities, and female entrepreneurs. Section 5 looks atevidence relating to the way in which the social embeddedness ofentrepreneurs, especially their participation in social networking, can

influence their attitudes towards accessing finance. Section 6 is concernedwith 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 waysin which the policies and actions of providers have affected the perceptions ofentrepreneurs. Section 8 is then concerned with considering other literaturerelating to the way in which the abilities and motives of entrepreneurs mayaffect their perceptions and attitudes towards external finance. Havingreviewed the existing evidence covered by this review, the final section of thereport assesses the current state of knowledge regarding perceiveddifficulties to accessing finance and identifies a number of knowledge gapsthat require further systematic research investigation.

2. THEORETICAL PERSPECTIVES

The analysis of existing literature relevant to understanding the impact of perceivedaccess to finance difficulties on the demand for external finance is based upon arecognition that the assumptions of much traditional financing theory does notaddress many of the constraints faced by would-be and existing entrepreneurs. Thisopening section is therefore concerned with outlining several other theoreticalperspectives that are considered helpful in this respect, drawing as they do upon

concepts in other disciplines such as organisational behaviour and socialpsychology. Five interrelated perspectives will be introduced: a systems

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perspective which demonstrates the need to look at financial issues within thebroader internal and external operating contexts; social network theory which drawsattention to the importance of the entrepreneurs social relations and networks; thepecking order hypothesis relating to entrepreneurs perceptions of alternativefinancial sources; theories of financial intermediation that contribute tounderstanding the nature of lender-borrower relationships; and finally personalconstruct theory which focuses on entrepreneurs perceptions of different aspects ofthe world in which they operate and how their experience of them shapes theirchanging perceptions.

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

2.1 A Systems Perspective

Despite a growing literature in the area of new venture creation, few studies haveexamined the venture creationprocess and even fewer studies have considered theinfluence of the contextof the process (Liao and Welsch, 2003). A systemsperspective to understanding the start-up and development of business organisationsdirects the researcher beyond the restrictions associated with focusing solely uponsmall business finance-related literature. Possibilities emerge for unfolding anunderstanding of entrepreneurial intentions, perceptions and actions embeddedwithin wider organisation sub-systems and disciplines of investigation. Positing the

small business as an open system highlights how, in order to survive, theentrepreneur must manage and coordinate the functional activities that make up itsinternal context and interface and build relationships with the various aspects ofhis/her unpredictable external operating context. For instance, of particularsignificance to this study are the ways in which external actors such as suppliers,potential customers or business advisors may influence a start-up entrepreneursperceptions, attitudes and behaviours. In particular, the systems perspective drawsattention to the likelihood that an understanding of entrepreneur and small businessfinancing is being progressively built up within the literature through lenses otherthan of a pure accounting perspective (Bianchi 2002).

Positioning of the entrepreneur/would be entrepreneur as a pivotal actor in adynamic and interconnected internal and external operating context draws attentionto the complexity of the small business development task in effectively managing thatcontext. Moreover, it leaves behind the over simplified conceptualisation of a smallbusiness sector and in its place considers the likelihood of unique individualentrepreneurs, operating in a unique problem and opportunity development context inpursuit of diverse development goals. Thus, those areas of traditional finance theorythat couch small business financing decisions in terms of wealth maximisationsignificantly over-simplify and filter out many key factors that can affect theentrepreneurs financing decisions (Van Auken 2005). An individual entrepreneur ismotivated 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). Itfollows, therefore, that the perspectives, preferences and perceptions of many would-

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be and existing entrepreneurs are likely to be embedded in motives for firmfoundation and development that transcend the assumption of profit or wealthmaximisation (for example, motives may influence attitudes and behaviour withregard 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 toexternal finance; or why some life style businesses shy away from utilisation ofexternal funding).

2.2 Social Network Theory

A key approach to understanding entrepreneur interconnectedness with the externaldevelopment context is that of social embeddedness. Entrepreneurship research hasrevealed how a nascent entrepreneurs social network is a major contributory factorto the start-up and development processes of a new venture. Moreover, evidencesuggests that women are more adept at building informal networks and that awomans social network and level of entrepreneurial self-efficacy positively influencesnew venture intentions and start-up success (Sequeira 2005). Social network theory

directs attention to how the social embeddeness of the entrepreneur may affectaccess 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 influencewhich firms obtain capital and at what cost (Uzzi 1999). For Carter et al (2006forthcoming), social network theory can provide insight into the complexities andsubtleties surrounding access and availability of bank finance and the relationshipsshared between banks and business owners. Moreover, whilst the successfuldevelopment of more progressive would-be and existing entrepreneurs may be theresult of positive learning through networking interfaces, including the challenging ofexisting personal beliefs or perceptions, for others a low level willingness or ability tonetwork and learn from others may be a key reason why existing attitudes and beliefsperpetuate.

2.3 The Pecking Order Hypothesis

With regard to would be and existing entrepreneurs perception of, and attitudetowards, use of alternative finance sources, Myers (1984) pecking order model hasrecently received support in the study of small business financial preferences, thoughoriginally designed for large quoted companies. The hypothesis suggests that smallbusiness owner managers attitude towards and use of financial sources are ranked:(i) internally generated equity; (ii) debt financing; and (iii) external equity from newowners (Serhiem and Isaken 2004). Some studies, whilst producing apparentcontradictions 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 leastinformation asymmetry (Hogan and Hutson 2005). The hypothesis offers a frame ofreference for consideration of literature based evidence on small business foundersperception of information asymmetries in debt and equity markets as well asperception as to whether tax benefits of debt exist and attitudes to levels of businessrisk. It also provides a context for consideration of entrepreneurial awareness of, andorientation toward, non-traditional sources of finance such as bootstrap finance andwhether this is used exclusively due to lack of capital or as a deliberate choice(Winborg 2005). The emerging theory of the discouraged borrowers (Kon andStorey, 2003) highlights how some existing small businesses believe they will not besuccessful in obtaining traditional external finance and would therefore not apply. Forexample, according to this theory, application rates will depend in part on the firms

perception of the banks screening accuracy. Some BMEB start-ups have been foundto be adopting the same discouraged borrower attitude and utilising bootstrap

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finance based on the perception that, given certain personal characteristics or lack oftrack 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 derivedfrom use of a principal-agent framework with regard to bank problems of adverseselection and moral hazard (Jensen and Meckling 1976); and in the theories offinancial intermediation which propound that relationships between banks andwould-be and existing entrepreneurs generate valuable private information aboutlikelihood of the financial success of the banks customer (Cole, 1998) and potentiallyinfluence the perceptions and attitudes of the customer toward the bank. Such ahypothesis suggests that relationship-lending, through closeness of a lender to aborrowing entrepreneur, can facilitate soft information via informal contacts andpotentially overcome the impacts of asymmetric information with the entrepreneurwhich conditions of non-relationship lending would not facilitate (Watanabe 2005). Italso draws attention to the extent to which close and distant bank-lender

relationships affect the conditions of borrowing such as price of the loan, collaterallevels demanded (Steijvers et al 2005), the extent to which collateral requirementsinfluence an entrepreneurs ability to raise finance (Hamilton, et al 2002) and howprior 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-borrowerrelationship extends to would-be entrepreneurs who have previously maintained anon-business account-holding relationship with the bank and the extent to which thisinfluences 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 theissue of would-be and existing entrepreneurs learning activities and abilities, andtheir willingness and ability to challenge existing personal beliefs and perceptions.Personal Construct Theory (PCT) (Kelly 1955) provides a frame of reference as tohow individual entrepreneurs actively try to make sense of their environment byconstructing their own theories or personal beliefs of their small business and itsoperating world, these being constantly built up, tested and adjusted in the light ofnew experiences. Such theory goes a considerable way to explaining the nature ofan entrepreneurs perceptions and the way he or she acts. For example, anentrepreneur can personally represent their firm and its environment, but later learnabout the personal constructions of others and proceed to place an alternativeconstruction on their own original representation. Drawing upon PCT, we recognise

that an entrepreneur may misrepresent a real phenomenon, such as a barrier toaccessing finance, and yet his/her representation will itself be entirely real whatthey perceive may not exist, but their perception of it does (Kelly 1955). Theparticular value of the PCT perspective is its directing of the literature review searchand analysis with regard to the identification of research studies which explore whylenders and small business owners act as they do, and which seek to uncovertaken-for-granted cognitive image rules that shape the relationships they shareandutilise new methods and theoretical perspectives with the ability to penetrate suchperceptions (Carter, Shaw and Wilson 2003).

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

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For the purpose of this investigation perception is considered to be an interpretationor impression based on ones understanding of something. It is a condition of beingaware: a level of awareness. It exists in the mind of an individual as the product ofcareful mental activity, possibly held as an idea, image, notion or thought (Pearsalland Trumble 1995).

Guided by the key premises of Personal Construct Theory (Kelly 1955), it isappropriate when attempting to identify and assess evidence of would-be andexisting entrepreneurs perceptions of difficulties relating to the accessing of financeto proceed on the basis that an individual may be adjusting their personal constructsand 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 someareas of their personal construct system from adjustment to an alternativeperspective, even in the light of new experiences. This may be because they feel it isin their interests to maintain current perspectives and beliefs; or for personal reasonsprefer to present a distorted picture (Kelly 1955). A self-serving bias may exist amongsome 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 blamesexternal factors for failure (Rogoff et al. 2004). For instance, entrepreneur self-reporting on issues such as personal abilities or inabilities carries a caveat ininterpreting the data in terms of the susceptibility of respondents to fall prey to self-serving bias and impression management (Fraser 2005). Moreover, while anentrepreneurs personal construct with regard to a given issue gives focus to what ishappening, it is effectively an abstraction of a limited boundary of reality which willalso blind the entrepreneur to wider contextual issues that may have relevance.

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

4. LOCATING THE PROBLEM OF PERCEIVED DIFFICULTIES IN ACCESSINGFINANCE

Overview

In this section we consider in which socio-economic groups and communities thereare most likely to be perceived difficulties in accessing finance. In recent yearsthere has been a substantial amount of research concerned with looking atenterprise and entrepreneurship in deprived areas and communities. Although thequestion of how would-be and existing entrepreneurs perceive the process ofaccessing finance is rarely tackled directly in these studies, they do neverthelessprovide some useful insights into the nature of the anticipated and actual difficultiesexperienced which in turn contribute to commonly held perceptions.

The evidence indicates various cultural influences on the perception of BMEBentrepreneurs, there being a commonly held expectation amongst certain ethnicgroups that they will be treated adversely, particularly by commercial banks.Perceived institutional discrimination affects BMEB entrepreneurs willingness toapproach banks for finance in some areas. A discouraged borrowers attitude existsamong some BMEB would-be entrepreneurs who feel it is fruitless, given their

background, approaching the banks for finance. It is likely that most viable bankablebusinesses in these areas could access required finance, but the challenge relates to

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supporting potentially viable businesses that face constraints, including perceptionsof mistrust or suspicion of formal institutions. A number of studies also indicate thatentrepreneurs living in deprived areas perceive themselves to be disadvantaged inobtaining bank finance because of a lack of collateral, arising from low propertyvalues or a dependence on rented living accommodation, and lack of personalsavings. There are also indications that perceptions by entrepreneurs have beenadversely affected by various supply-side changes, notably bank rationalisationleading to the removal of small business support services from local areas.

Women are another group where issues of perception with regard to accessingfinance appear to be particularly important and here there are recent and currentstudies that provide particularly helpful insights. The issue of low confidence levelsamongst female would-be and existing entrepreneurs surfaces in several studies,leading to negative perceptions about their chances of success in applying forexternal funding. Consequently, there appears to be a greater reliance on informalsources amongst women. There is evidence that issues such as inadequatepersonal assets, sexual stereotyping, and lack of business track record contribute to

finance being a challenging issue for some women. Women invariably use lesscapital at start-up than men and are more likely to encounter credibility problems withbankers. However, women who present a viable business proposition with adequatecollateral and who show credibility are likely to be successful in loan applications.Some evidence suggests that womens perceptions are influenced by the type ofbusiness many of them are running (i.e. low tech service businesses) and the factthat 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-termfinancial commitments.With regards to the influence of age, available evidence suggests that the attitudeand perceptions of graduate would-be entrepreneurs to business start-up is

influenced by existing debt levels resulting from their studies, whereas many of thoseaged over 50 contemplating business start-up have concerns about using their ownsavings 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 deprivedcommunities is an inaugural report which aims to identify the key issues and providea benchmark against which progress can be assessed. The study covers all parts ofthe UK and utilises an extensive series of regional visits to a mixture of urban andrural areas, drawing on the expertise, local knowledge and contacts of the Banks

twelve regional agencies. A wide range of perspectives were derived from meetingswith representatives from businesses, finance providers, CFIs, councils, creditunions, support networks, etc. In the absence of significant quantitative informationrelating to small business access to finance the Bank utilised main clearing bankscustomer base data. To a great extent, however, the report draws upon anecdotalevidence to flag up potentially crucial issues.

The report highlights several potential barriers to accessing finance in deprivedcommunities. Whilst constraints centring on information asymmetries are notrestricted to lending in deprived communities, such asymmetries may be accentuatedwithin them.

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

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living in rented accommodation. Anecdotally, the report offers the example of thesubstantial fall in property prices in Salford in the North West region which had takenplace over the few years prior to the investigation as indicative of possible sources ofcollateral shortages. Anecdotal evidence also suggests that many individuals living indeprived communities frequently are reluctant to agree to offer security or guaranteeseven if they do possess personal assets. It is considered unlikely that would-beentrepreneurs living in deprived areas will have adequate personal savings to providea capital injection that a bank may expect from a loan applicant as demonstration ofcommitment and bearing of risk.

The Bank of England (2000) study suggests that inadequate business skills, limitedwork experience and access to role models and restricted opportunities to use andbenefit from informal contacts and networks are key factors that may constrain startup and successful development of a viable business in deprived areas. Backgroundand experience thus contribute significantly to the framing of current perceptions interms of a would-be entrepreneurs views and personal constructs ofentrepreneurship, and limited opportunities to network and interface with role models

and informed contacts restrict the potential for adjusting existing views andperspectives.

A particular supply-side issue highlighted by the Bank of England report is that of theeffects of bank rationalisation on small firms in deprived communities. Theconcentration of branch closures in urban areas can have an adverse impact onindividuals in deprived areas in terms, for example, of increased time to visit the bankand 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 opportunityfor a business to develop a sound relationship with its bank and possibly reduceconfidence in dealings with the bank (see also 7.1.3.)

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

4.1.2 The SBS commissioned study (Allinson et al. 2005) suggests that theperception 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 suggeststhat people from an ethnic minority background are more likely to believe that it takeslonger to start a business and that there is also too much red tape in the financialprocess. It seems that cultural factors can affect the relationship between the smallfirm and lending institutions. The SBS report suggests that the way to tackle thisperception is to organise seminars on specific topics and to tailor advice to aparticular ethnic community accordingly.

4.1.3 In Scotland, perceived institutional discrimination appears to be a factor leadingto reluctance on the part of BMEB entrepreneurs to approach external sources offinance (Deakins et al., 2005). Interviews with the owners of 41 BMEBs showed thatthey had a heavy reliance on personal and family sources, both at start-up and poststart-up. There was a marked reluctance amongst these Scottish BMEBs toapproach or attempt to use bank finance after start-up or for development finance,

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

4.1.4 A seminal report relating to enterprise in deprived areas focuses on enterpriseand social exclusion and was undertaken as part of the National Strategy forNeighbourhood Renewal (Policy Action Team 3 Report, HM Treasury, 1999).Drawing upon evidence from a number of research studies, the report refers to anumber of common perceptions about the difficulties of accessing finance foundamongst small business owners in deprived areas. For example, the study refers tohow 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 thedemand for it has widened (this is discussed in 7.1). It also refers to evidenceshowing that many BME businesses perceive themselves to be treated adversely inobtaining finance, feeling that the standards applied to them are more exacting thanto non-BMEs in terms of proving the business case. On the basis of evidenceshowing that there is a gap between the provision of banking finance and the needsof enterprises in deprived areas, the PAT3 report sets out the case for a number ofcommunity finance initiatives which go beyond the strictly commercial criteria forsupporting what are often marginal businesses to take into account the wider socialbenefits of supporting enterprise development in deprived areas. The PAT3 reportsrecommendations led to the creation of the Governments Phoenix Fund aimed atencouraging 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 Fundhas been support for the Community Development Finance Institutions (CDFIs)which in turn are concerned with addressing market imperfections in the provision offinance to new and existing enterprises, particularly those run by entrepreneurs fromdisadvantaged groups.

The SBS commissioned evaluation of the CDFI included an interview survey of cliententerprises in disadvantaged areas (GHK, 2004). This shows that most clientsreceived 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 offinance 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 saidthat they would have had to close their business without the loan. This thereforegives a measure of the gap that exists in the market which the CDFI is helping tobridge. The finance provider interviews also indicated that there was very limiteddeadweight associated with CDFI lending to clients since they did not regard theCDFI clients as bankable firms. The researchers estimate that just 5 per cent of theCDFI clients could have been funded by other external sources.

4.1.5 Collard et al (2001), in their UK study of disadvantaged areas, highlight howself-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 smallamounts of working capital. The study focused upon local people (business and non-business) in Bristols Barton Hill district who were on the margins of financialservices. The study adopted a participative research approach, beginning with a

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series of six focus groups to identify the main difficulties that people experiencedgetting access to financial services. The groups embraced 42 participants: men andwomen of all ages, disabled people and people from the Afro-Caribbean and Somalicommunities. These group discussions were followed by in-depth interviews with arange of financial service providers (banks, Post Office, Association of British CreditUnions staff). Finally, two select committees were run (for a full day each) to allowlocal people to consider all information gathered and to hear from, and crossexamine, 13 of the service providers who had been interviewed.

Key issues highlighted by the study relate to a lack of individual understanding as tohow to approach the issue of raising finance i.e. financial illiteracy, uncertainty as towhether banks can help somebody like me, a perceived affect on customerorientation with regard to the banks centralising of their services and, for the Somaliwomen, the need for a creative approach to provision in the form of non-interestbearing loans. A crucial policy issue centres around the views conveyed by manyyounger individuals in the study that they felt ill-equipped to manage money in theearly 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 minorityemployment and business growth draws attention to the increasing importance ofBME businesses within the UK economy (National Employment Panel, 2005). TheNEP commissioned data from the GEM survey which shows that entrepreneurialactivity amongst ethnic minorities is higher than amongst the white population (7.4per cent and 4.7 per cent respectively) and that this difference is particularly markedfor those in the 18-34 age group. The study cautions against a generalisedperception that access to finance for BMEBs is a serious problem, although it doesaccept 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 doesindicate that BMEBs are more likely to experience difficulties in accessing financethan non-BMEBs. Whilst the proportion attempting to obtain finance over a 12 monthperiod is almost the same (24 per cent), the proportion of BME firms reportingdifficulties 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 asignificantly higher proportion of BMEBs are seeking finance to buy or improvepremises than non BME businesses, coupled with the fact that a higher proportion ofBMEBs are located in deprived areas. It is suggested that banks are less willing tolend money to extend or refurbish premises in deprived areas. The NEP studysuggests that the practice of redlining i.e. withholding finance from neighbourhoodsconsidered 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 Caribbeanbusiness owners in London, utilising focus groups and semi-structured interviewswith 28 owner managers, revealed that many of the owner managers perceived thatexternal finance is difficult to access and some did not approach a bank for fundingbecause they felt that they would be unsuccessful. For some, this was due to aperception of negative stereotyping on the part of the bank manager (CEEDR 2000).

4.1.8 An evaluation of the Brent Business Ventures Fresh Start in BusinessProgramme (CEEDR 2005) unfolded further evidence of a discouraged borrowersattitude amongst some BMEB entrepreneurs who were trying to start a business for asecond or third time and who felt that, given certain personal characteristics or lack ofbanking track record, it would be futile to attempt to seek out external finance.

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4.2 Female would-be and existing entrepreneurs

Women are another group where there are reasons for thinking that their access tofinance 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 Tolloss (2002) investigation of the perceived needs of male andfemale Hispanic and Anglo pre-venture entrepreneurs with regard to financial andaccounting assistance draws attention to the potential impact of low confidencelevels amongst female would-be entrepreneurs. Groups of male and female pre-venture entrepreneurs participated in a self-assessment process. The womenentrepreneurs perceived that they require more help in the area of financial andaccounting needs than the male pre-venture entrepreneurs. However, when eachgroup was assessed by the study consultants, the consultants perceived that it wasthe male group that required more help: a reverse interpretation of the female clients

perceptions which suggested that the female entrepreneurs needed less financialaccounting assistance than the males. A key conclusion was that the participantfemales views of help needed may reflect low confidence levels.

Integral to this and other studies (for example, Brown 2002) is the possibility of manyfemale would-be entrepreneurs underestimating or failing to recognise their realcapabilities and to possess a real fear of failure (GEM Monitor 2002) and that asupport 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) drawsattention to the need for care in the interpretation of barriers to venture creation and

development by women. The exploratory random sample study utilised telephoneinterviews to compare 52 women and 92 men throughout Canada across a numberof constructs relating to new venture start-up and development and the findingssuggest that in many instances women are very similar to male nascententrepreneurs. This includes contradiction of some issues that Menzies suggestsmay be derogatory myths, one of which being that women do not have the financialsavvy to start high growth businesses. For Menzies, the presence of stereotypicalmyths about women impacts and influences potential and existing femaleentrepreneurs, and those associated with women in business such as bankers,clients and suppliers.

Wilson, Carter, et al (2006 forthcoming), emphasise that there is little conclusiveevidence regarding why finance poses such a challenge for women business owners.Although some studies point to sexual stereotyping, discrimination, lack of banking orprofit track record and inadequate personal assets, other studies fail to confirm suchfindings. This is in part due to the different research methodologies used.

4.2.3 Harrison et al. (2005) have investigated womens perceptions of the experienceof raising finance for the start up and growth of their business, based on a purposivesample of ten female entrepreneurs in Northern Ireland operating in sectors notnormally associated with women run businesses. The results suggest that thewomen in the study perceived sourcing finance to be a problematic issue, particularlyat 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 weredespite the fact that the investigation of the supply side revealed no evidence of

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conscious discrimination against women-owned businesses on the part of banks (seealso Carter et al., 2005). The interviewed women also had negative perceptions ofbanks as sources of finance, as illustrated by the following quotes: the company isnot interested in bank finance because the banks are risk averse and dontunderstand the needs of small businesses; and the banks want to lend you moneywhen you dont 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 werefound in a study in North West England which interviewed 22 women and involved afurther 77 in four focus groups (Fielden et al., 2003). These were all women whowere either considering starting a new business, were in the process of businessformation, or were operating a new small business. The study indicated that over 57per cent of women in business start-ups had received help from the new businessowner package provided by the high street banks and were pleased with the helpthey had received. However, established business owners were far more scepticaland 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 toa smaller stock of start-up resources and less familiarity with credit sources (Brush etal., 2005). Their access to equity funding is still extremely limited (Carter et al., 2002)and consequently Brush et al. (2005) suggest that women use bootstrappingmethods to finance their ventures (see also 6.3). In a study of women entrepreneursin 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 experiencein business and financial services, many of them having had careers in marketingand human resources previously. A second disadvantage is that they tend tooperate businesses which are low tech micro enterprises in the personal service

sectors, have low equity, and have limited growth potential. And thirdly, womenentrepreneurs may see themselves as not fitting the normal business ownerstereotypes in that they are not prepared to sacrifice their right to flexibility, familyand lifestyle. Family factors, and especially parental status, play a key role inshaping fundamentally different perceptions among different types of womenentrepreneurs, with those with dependent children tending to place more emphasison independence as a measure of success than other types of entrepreneurs (Justoet al., 2005).

In terms of raising money to start their business, women are more likely to be morepessimistic than men according to the SBSs study of the myths surrounding startingand 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-upand growth finance and that women encounter credibility problems when dealing withbankers. The report stresses that women start in business with only one-third theamount of capital used by men and that men are more likely to use external financingfor on-going business than are women. Wilson et al (2006) also suggest that womenare more likely to have concerns about the extent to which bank lending officers areeven-handed in their treatment of clients (see 7.1.7).

4.2.5 Marlow and Carters (2006) study on the link between finance, gender and self-employment combines quantitative and qualitative research of key issues andconcepts. Using an electronic survey of owners of small accountancy practices, thestudy examines the views of ACCA members with regard to business advice andgender: 564 responses were obtained. A telephone survey focused on 30 male and30 female small-firm owners to facilitate examination of the experiences of small firm

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

The study demonstrated how gender is influential in shaping the experience ofbusiness ownership for female small firm owners and female accountants runningtheir own small practice. For example, female owned firms are more likely to besmaller, to operate on a part-time basis, to be located in lower-order services, anddevelop around the domestic responsibilities of the owners. Many have fewer growthambitions.

With regard to how gender considerations influence the supply of and demand forbusiness finance, Marlow and Carters study confirms: (a) existing literature in terms

of women favouring informal sources of finance, retained profit, grants and to alesser degree bank finance, with men more likely to draw upon a range of formalfunding options; and (b) the Fraser (2005) investigation in that it seems the majorityof 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 formalfunding which are adequately prepared, are for viable businesses and considered tohave 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 financegap, at least for female owned accountancy practices.

The evidence of the study does, however, underline that the demand for finance isinfluenced by gender considerations in that women seem to be more risk averse thanmen; they tend to apply for smaller amounts when seeking formal funding; and to acertain extent appear to be reluctant to reapply to other sources of finance if initiallyrefused. The findings do support Carter et al (2001) in showing that if businesseshave lower levels of overall financial capitalisation, lower levels of debt finance and agreater reliance on personal savings, they are likely to under perform and be morevulnerable 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 someindication from focus group evidence that younger would-be entrepreneurs arereluctant to take on more debts until they have cleared their student loans (Allinson etal. 2005). It might be suggested that with more of the cost of higher education fallingdirectly onto students themselves, this is becoming an important barrier to potentialgraduate entrepreneurs. The average student dept was 12,500 in 2003 and isanticipated to reach between 20,-30,000 after 2006 when top-up fees kick-in(Barclays Bank, ACCA-NGCE, 2004). The National Council for GraduateEntrepreneurship is therefore concerned that levels of graduate entrepreneurshipmay decrease as graduates perceive that entrepreneurship is yet another financialrisk 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)

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There are also indications of a cautious attitude towards accessing finance by thoseaged over 50 who are going into self-employment or starting a business (Allinson etal. 2005). Whilst they invariably have their own funds, they tend to be reluctant to riskthese 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 andexisting entrepreneurs are socially embedded will be a key influence upon theirperception of the ease with which they can access different sources of finance.Numerous authors have emphasised the importance of social networking to learningabout 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 oneof the barriers that needed to be overcome, and that women entrepreneurs are lesslikely than their male counterparts to engage in business networks. However, fromthese studies it is only possible to infer the influence of social networking onperceptions to accessing finance, there being no study which addresses thisexplicitly.

5.1 Social Networking

5.1.1 There is indisputable evidence that successful start-up and growth-seekingsmall businesses utilise networking activities to obtain key information, underpinlearning about their opportunity and problem contexts (Wyer, et al 2000) and to gainaccess to, or enhance understanding of, sources of finance (Steier and Greenwood2000). The more progressive would-be and existing entrepreneurs are consciouslyaware of the positive role of dialogical learning (Hawkins 1994) through interactionsand dialogue with key informants on the boundaries of the start-up or new venturesactivities, including potential customers, suppliers, distributors, bank managers,accountants and lawyers. However, many would-be and existing entrepreneurs failto fully exploit the advantages integral to networking due to a lack of awareness orunderstanding of its benefits, or perceived or real barriers to network inclusion.Barriers faced by small businesses in seizing network opportunities vary greatlydepending on the type of firms, including level and forms of innovativeness (OECD

2004 (a)), and on the characteristics, capabilities and perspectives of individualentrepreneurs. For example, it is suggested that for a variety of reasons, includinglack of previous management experience or contacts and low confidence levels,some women find it extremely difficult to access informal financial networks (Olm etal, 1988). Whilst some studies have begun to question propositions such as the levelof womens management experience vis--vis men (Menzies 2004), it is clear thatsome individual entrepreneurs (male and female) are faced with real barriers withregard to networking and/or are unaware of the resource and knowledge-addingpotential of networking as a management process. The Bank of England (2000)report discussed earlier reiterates such potential constraints for small businessesattempting to start-up or operate in deprived communities.

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

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overwhelmingly perceived as the greatest constraint on innovation, the use ofexternal actors to help overcome barriers to innovation is extremely limited, despitethe wealth of literature advocating how networking is proving to be a universalsolution to small firm problems it may be that small firms in Cardiff have yet to beconvinced (Williams 1997). Whilst a generally positive impression was portrayed bysome of the participant small firms, a common complaint was that the kind of helpoffered is too general. Other firms had formed negative opinions even though theyhad not interacted with an agency. The study concluded that many of the negativeperceptions and impressions expressed are based on presumptions that are untrue.

5.1.3 Integral to effective utilisation of network opportunities is would-be and existingentrepreneurs ability to learn-how-to-learn. For some commentators, while somefinancial constraints have been traced to failures in the market for information andadvice, it is less likely that this is due to lack of availability of information. It is perhapsmore related to lack of awareness of sources of information or to managementcompetence (Cook 1999). It has been suggested that the majority of SMEs do nottake full advantage of networking opportunities and that this is due to their lack of

motivation and low capability levels. Organisational inadequacies, unavailability ofkey 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 als (2005) study of SME access to finance and propensity to grow (see6.1.4), emphasises the significance of the role of networks and connections and howentrepreneurs social relations are crucial in broadening access to sources ofexternal funds. For instance, ongoing or previous SME-bank relationships, asindicated by some theories of financial intermediation (see 2.4), convey privateinformation about the small business financial performance and give the bankconfidence regarding provision of further financial support.

5.1.5 It should be emphasised, however, that social networking can also have anegative impact on the perspectives and behaviours of would-be entrepreneurs. Forexample, whilst no clear empirical evidence has been found in this review, PersonalConstruct Theory would suggest that it is possible that network learning interactionswith individuals who have unfounded pessimistic views of finance providers andbusiness advisers can negatively affect the views and understanding of would-beentrepreneurs and constrain positive enterprise development activity.

6. ENTREPRENEUR PERCEPTION AND AWARENESS WITH REGARD TOALTERNATIVE METHODS OF RAISING EXTERNAL FINANCING

Overview

In some respects, it is difficult to obtain a coherent picture of entrepreneursperceptions of alternative methods of raising external finance as the existingliterature covers a range of different national and regional contexts as well asreflecting different research methodologies. With a few exceptions, the issue ofperception has not been addressed explicitly, although researchers often interprettheir 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 tendto confirm the pecking order hypothesis in showing that at pre-start and start-up,

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entrepreneurs have a strong preference for using personal and informal sources offinance 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 sourceof external finance with some studies pointing to relative ease of access to suchfunding. There seems broad agreement that it is the perception of would-beentrepreneurs that they will be unable to provide the necessary security which is themain reason for not applying for bank finance.

Individuals from lower socio economic backgrounds are more likely to perceivedifficulties in accessing bank finance. There is also evidence that younger businessowners are more likely to express dissatisfaction with banking issues and availabilityof loan and overdraft finance. A perception exists amongst some individuals seekingself-employment that banks are formula-driven, lacking adequate understanding ofsmall business needs, and that this is likely to be a barrier to them accessing bankfinance.

Particularly interesting is the number of studies drawing attention to the increasingpreference that entrepreneurs have for various bootstrapping methods of financing,one of the most commonly used being personal and business credit cards. The easeof accessing un-secured capital and flexibility are perceived as the main advantagesover other external sources of finance, with several studies emphasising the need toeducate existing entrepreneurs and would-be entrepreneurs as to the advantagesand downsides of utilising such funding methods.

Equity finance tends to be the least preferred source, concerns over the loss ofmanagerial control being cited in most studies as the perceived disincentive. Informalinvestors such as directors, friends, family and existing shareholders are preferred

sources of equity for many would-be entrepreneurs as they strive to address thefunding 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 apackage of value-added which includes expertise and business contacts.

Negative perceptions of would-be entrepreneur regarding availability of grant aidoften reflect a lack of understanding of what funding is available and how to accessit.

6.1 Studies covering a range of sources

6.1.1 The evaluation of self-employment assistance provided by The Princes Trustgives robust survey evidence of alternative funding sources for start-up enterprises,based on two thousand responses from client entrepreneurs (Department ofEducation & Skills, 2001). Besides funding from The Princes Trust, the three mostcommonly used sources were personal savings or assets (23.6 per cent), bank loansor overdrafts (13.6 per cent), and loans or gifts from friends and relatives (8.3 percent). However, the amounts invested from these other sources tended to be verysmall, with a mean of 2,748 (median 1,500), although the average size of bankfinance tended to be larger (mean 3,362; median 2,000). Interestingly, the authorsof the study conclude that it did not appear that The Princes 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-Princes Trust sources.

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6.1.2 This conclusion is contradicted by other evidence relating to the demand forstart-up finance. An Advantage West Midlands commissioned study (AWM 2003)investigated the market gaps in mainstream provision of loan finance of up to50,000 to micro, small, medium and social enterprises in the West Midlands. Thestudy involved demand-side analysis of access to finance gaps using existing surveydata; in-depth telephone interviews and face-to-face survey interviews with bankersand CDFI practitioners; and a funding review of available funding for CDFIs. Theresearch findings emphasise that micro-enterprises experience an access to financegap. The study estimates that there are approximately 18,000 West Midlands micro-enterprises (both formal and informal) that cannot access mainstream finance, butwhich do have a viable business and the capability to take on and sustain debt tosupport the growth of their business. These findings are largely consistent with thoseof the evaluation of the CDFI (see 4.1.4) in showing that there is a substantialdemand for external finance from micro enterprises that are not consideredbankable by mainstream providers.

The study also estimates that at least 10 per cent of the unemployed have anorientation toward and interest in starting a business. This represented 14,000potential business start-ups out of those unemployed in 2003. It is felt thatapproximately half of these businesses would have a sufficiently viable business ideato be a good credit risk, but access to finance would be the main constraint sincesuch 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 studyprovides survey evidence on the 100 fastest growing inner city firms. For thepurposes of this review it is of limited value as it is concerned with establishedbusinesses of various sizes, rather than pre-starts or start-ups, although it doescapture 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 extentto which fast growth inner city firms differ from their counterparts elsewhere.

However, with these significant qualifications in mind, the IC 100 study does providesome evidence on the attitudes of business owner-managers to accessing financefrom a range of sources. When asked about the factors limiting their growth, accessto finance emerges as one of the two main factors, (alongside access to skilledworkers), with 25-30 per cent identifying this as limiting their growth in the 2001-2003surveys. For these fast growth businesses, both bank loans and overdrafts wereimportant sources of growth finance (each being used by 19 per cent of the surveyedfirms) 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 ofthe 2004 survey, only 8 per cent had pursued it successfully, and this did not includeany of the women-owned businesses. Fear of ceding control over the business wasthe 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 offast growth businesses showed a significant information gap relating to the specialfinancial initiatives applying in deprived areas. Thus only 12 per cent of the firmswere aware of the Early Growth Funds and 22 per cent aware of CommunityDevelopment Finance Initiatives, whereas 63 per cent were aware of the Small FirmsLoan Guarantee Scheme.

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6.1.4 Vos et al (2005) discussed the potential constraints on SME expansion, givenliterature-based suggestions that a finance gap exists. The research considersprevious 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 abilityto grow using retained profits generated through normal business activities. ThoseSMEs that seek external funding usually obtain the finance they want. The studysuggests that since most entrepreneurs value control and so prefer not to accessexternal debt, lower propensities to acquire outside funds need not imply financialconstraints for SMEscontrol creates contentment for entrepreneurs. The studyrejects conventional wisdom both with regard to the existence of a finance gap andthat informational opacity deters SMEs from seeking external finance to underpintheir growth intentions. Most SMEs remain within the confines of their ability tocontrol growth and those who do seek external funds are usually successful.

Importantly, the study suggests that, in quantifying SMEs propensity to accessexternal 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, amountof 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 accessingbank finance are provided by a large scale survey that the Federation of SmallBusinesses conducted of its membership, based on 18,561 responses (FSB, 2002).The survey found that dissatisfaction with the availability of loan finance and theavailability of overdraft finance was greatest among the youngest firms (those underthree 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 dissatisfactionwith the availability of overdraft and loan finance. Levels of dissatisfaction with banksupport for their business were found to be highest among the smallest sizebusinesses and least apparent among the largest ones. This largely reflects theactual use of bank sources, since 70 per cent of businesses with annual turnovers ofover 500,000 used bank overdrafts, compared with just 41 per cent of businesseswith turnovers of less than 50,000. Similarly, almost all the larger businesses usedbank loans compared with just 34 per cent of the smallest businesses.

6.2.2 The SBSs study of the myths surrounding starting and running a business(Allinson et al. 2005) highlights that those from the lower socio-economic groups aremost likely to believe that bank finance is more difficult to obtain. Levels ofpessimism about the chances of obtaining a bank loan were found to be highest inthe poorest socio-economic groups (60 per cent of those in groups D and Ecompared with 14 per cent in groups A, B and C). Those who had recentlyconsidered entrepreneurial activity, but decided against it (active avoiders), weremainly deterred by what they perceived to be resource barriers (i.e. a lack of theirown finance or assets) rather than by a shortage of skills and ideas. However, veryfew 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 variousfocus 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

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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 becausethey are not prepared to understand the situation of small business owners as theyare blinkered and rely upon a formula driven approach. Many would also bediscouraged from obtaining bank finance because they are reluctant to pay bankcharges and interest rates, they have no credit history, and are concerned aboutbanks requirements for security. The financial implication of failure, particularly thefear of losing a house, was a significant fear and a reason for the manifestly cautiousattitude to applying for loans. The following examples illustrate some of theperceptions that members of the different focus groups had of the banks.

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Perceptions of applying for bank finance by focus group members (Allinson etal. 2005)

Participants complained that banks tend to be poor at judging a good business idea and thatthey are particularly unhelpful to new small businesses: once youve established andgenerated your own funds, banks are more prepared to help.

A participant was concerned about banks requirements for security you could potentiallylose 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 totheir 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 thatbanks were the last place you would want to go and prohibitively high interest rates wereexpressed as taking your eyes out.

Regarding borrowing, four of the group thought this would be impossible, given that they wereunemployed and/or had no bank account or credit history. Opinions include banks dont lendto the unemployed and loans depend on background.

There was consensus that access to start-up capital through a bank loan would be verydifficult 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, Wed all love a low interest rate but the reality is a huge risk factor and largeinterest rate. A further issue was the casual interest of banks tow

Documents

The Impact of Perceived Access to Finance Difficulties on the Demand for External Finance-UK-2007