related documents
RR66 - Micro-Credit in a UK Context
ACCA Research Report No. 66
The aim of this study was to investigate the need for and use of micro-credit and other sources of finance in small firms. The objectives in pursuit of this aim were as follows:
The next stage of the study was an examination of the nature of the finance gap for small firms, for which QCOM finance has been proposed as a potential solution. Information asymmetry and related market imperfections such as adverse selection and moral hazard can produce a finance gap that is exacerbated by the characteristics and nature of the small firm and by trends in the small firm finance market. QCOM finance can in theory provide a mechanism to overcome high screening and monitoring costs and deal effectively with, and possibly even reduce, small firm risk.
The main objectives of the study were achieved through a two phase primary data collection approach. The first phase involved grounding interviews with providers of finance, intermediaries in the small firm finance market and small firms. The second phase comprised a questionnaire survey of 1,000 small UK firms. Our main findings are summarised below.
The recommendations of this study are considered in relation to three groups: small firms, accountants and policy-makers.
Tucker and Lean, 2001
Executive summary
The aim of this study was to investigate the need for and use of micro-credit and other sources of finance in small firms. The objectives in pursuit of this aim were as follows:
- to establish a clear definition of micro-credit
in a UK context and to produce a typology of the different forms of
informal finance
- to determine the extent of awareness and use of
informal sources of finance by small firms
- to establish the rationale for the use of
informal sources of finance, rather than traditional bank lending, by
small firms and to determine how use varies with the firm’s strategic
objectives and its stage of development
- to develop conceptual models to explain the
financing problems of small businesses and small business finance market
interaction
- to outline implications of the investigation for small businesses, accountants, and small business finance policy.
The next stage of the study was an examination of the nature of the finance gap for small firms, for which QCOM finance has been proposed as a potential solution. Information asymmetry and related market imperfections such as adverse selection and moral hazard can produce a finance gap that is exacerbated by the characteristics and nature of the small firm and by trends in the small firm finance market. QCOM finance can in theory provide a mechanism to overcome high screening and monitoring costs and deal effectively with, and possibly even reduce, small firm risk.
The main objectives of the study were achieved through a two phase primary data collection approach. The first phase involved grounding interviews with providers of finance, intermediaries in the small firm finance market and small firms. The second phase comprised a questionnaire survey of 1,000 small UK firms. Our main findings are summarised below.
- While the qualitative interviews suggested that
for certain types of firm (e.g. community businesses), QCOM finance
played an important role, the survey revealed that for small businesses
in general, both awareness and use of QCOM finance were extremely
limited.
- The survey also found that where firms do use
external finance, this is most likely to come from conventional sources,
and in particular high street banks. Interestingly, a significant
minority of firms used no external finance at all.
- The qualitative research identified a number of
possible factors that were important in determining the firms' use of
different types of finance. These included: financial track record and
stage of development, the role of support, advice and mentoring, and the
constraints of collateral and goal divergence.
- The majority of questionnaire respondents were
satisfied with the current provision of external finance and many
perceived few difficulties in accessing finance, indicating that most
firms have no reason to use QCOM finance.
- Statistical analysis showed that, apart from
some limited effects related to size and the growth objectives of the
business, there were few significant variations in either the choice of
different financing forms or the use of external financing generally.
This suggests that neither stage of development nor business objectives
are important determinants of the use of external finance.
- Overall, findings suggest that while in theory
there is a role to be played by QCOM finance, in fact its current role
is limited for most firms. Indeed, for the average firm the evidence
suggests that there exists no debt finance gap. However, an equity
finance gap may well exist for certain firms.
- While for the great majority of firms there appears to be no debt finance gap, the very nature of social exclusion is that it affects only the minority. Therefore, there is potential for financial exclusion of certain groups of owner-managers and their firms.
The recommendations of this study are considered in relation to three groups: small firms, accountants and policy-makers.
- Small firms need to be made aware of the full
range of QCOM options available and their relative merits, particularly
those firms in the start-up phase.
- Accountants need to be able to recognise when
their clients' finance needs might be addressed effectively by a QCOM
provider. They should also be able to present information effectively,
to satisfy not only financial (hard) criteria but also non-financial or
soft criteria, in a systematic and effective way.
- Policy prescriptions in this area should be focused in nature, addressing the needs of the minority of firms for which a finance gap exists. Two main groups affected appear to be micro start-ups owned by individuals who are socially excluded (who need small-scale debt finance) and small businesses with high growth potential (which have a need for new equity risk capital).