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 Scottish 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 because 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 encountered problems and that only a small minority had to abandon their projects completely as a result, both start-up and early stage businesses and manufacturing SMEs were disproportionately likely to experience problems. These were largely attributed by owner-managers to their lack of a track record of debt management in the case of young businesses and difficulties 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 to have become larger since 2007 as a result of the credit crunch.