Written evidence submitted by Delta Economics|
1.1 Delta Economics has been surveying the same
panel of entrepreneurs in the UK since the late summer of 2008.
They surveyed growth-oriented entrepreneurs who run young companies
(2-10 years old) with turnovers of above £250,000. The sample
size in 2008 was 1,800, this had fallen to 900.
1.2 Between 2008 and 2009, the average turnover
of businesses in the survey dropped from £1.51 million to
£1.23 million (or nearly 23%). Between 2009 and 2010 turnovers
rose again to £1.58 million (or 31%).
1.3 The companies in the sample in 2010 are the
ones that have survived the downturn. On average, they have invested
£180,000 at start-up in their business. They will put in
nearly 70% of that amount from their own money (or £126,000),
often from their own savings. The remainder of the money comes
from a variety of sources as illustrated in Figure 1.
SOURCES OF EXTERNAL START UP FINANCE ACCESSED
|Source of finance to start business
|Family and friends||14.0
|Small firms loan guarantee scheme (SFLGS)
|Enterprise finance guarantee (EFG)||2.1
|Other government grants||7.4
Source: Delta Economics, COGS 2010
1.4 These are the "survivor" companies who are set
on a growth path and therefore may not have the same patterns
of access to finance as a more general small business population,
although access to SFLGS finance and VC finance is consistent
with other surveys. What is remarkable, however, is how few companies
use bank finance when starting up their business.
1.5 Just 15.8% of these companies are looking for finance
now and this figure has not changed since 2009. This gives some
credence to the view that demand for finance has slumped during
the recession. 81.6% of those who are looking for finance now
are looking for growth finance, 29.0% for working capital and
66.5% are looking for finance for investment.
1.6 Those who are looking for finance now are predominantly
looking for finance from bank overdrafts (20.3%) or bank loans
1.7 85.2% of those who say they are not looking for finance
now are not looking for finance because they say they have no
need for it, as illustrated in Figure 2.
REASONS FOR NOT ACCESSING FINANCE
|Reason for not looking for finance
|No need for finance||85.2
|No point in trying because banks aren't lending
|Cost of finance too high||19.8
|Lending terms are too stringent||22.6
|Deterred by bank manager or other bank staff
|Have the finance myself||57.0
Source: Delta Economics, COGS 2010
The number of respondents answering that banks were not lending
in 2009 was 17%, so this suggests that that there has been a slight
increase in the numbers answering positively to this question.
1.8 Delta Economics has conducted in-depth interviews over
the last two years with 150 entrepreneurs, financiers and business
support professionals in the UK and beyond. The tightening of
credit has been a feature of these discussions and, from the experiences
of entrepreneurs in accessing finance and from financiers themselves,
the automation of credit risk profiling along similar lines by
providers of finance has limited the degree to which individual
providers have leeway to make decisions other than on the basis
of credit scores, proven track-record and confirmed future contracts.
Smaller turnover businesses have been particularly affected as
the margins in this segment are small, meaning that there are
fewer providers who increasingly price for risk, which pushes
2. INTERPRETATION AND
2.1 In 2008, 38% of founders looked to banks to provide their
external finance that they were not providing themselves. The
figure is 29% amongst the "survivor" companies in 2010.
This highlights a significant point; that the banks are not necessarily
the biggest or the best source of start-up finance. The survivor
entrepreneurs sought a great variety of finance including private
investors, other directors and family and friends. They were also
prepared to take a financial risk themselves. It is a mistaken
belief that banks will provide loans without collateral and/or
some form of co-investment by the entrepreneur and this data points
out just how substantial that risk is for the entrepreneur.
2.2 Inevitably, therefore, banks are not the most appropriate
source for start-up finance where amounts are small and risks
to the banks are high. This is a well-known facthence why
the role of family, friends and private investors is so substantial
at the start-up stage. However, there is some evidence to suggest
that before the financial crisis a number of banks were less risk
averse than others, providing more in terms of individual interpretation
of business plans and less pricing for risk.
2.3 As the banks have merged and the credit environment has
tightened, our qualitative research suggests that banks have gone
over to credit risk profiling which is an automated process. The
scope for providing differentiated services to start-up and growth
businesses has become more limited. This means that the relationship
manager's role in building a trust base to financing the business
may have become more limited. Some 8.4% of those who have not
accessed finance were deterred their bank manager from doing so,
possibly because of the fact that the credit history or risk profile
would mean that the finance application would be rejected. Our
qualitative research also supports the suggestion that relationship
managers themselves may have deterred smaller, riskier businesses
from putting in applications for finance that are likely to be
2.4 Given that our sample was biased towards growth-oriented
entrepreneurs, this is likely to be magnified across a general
business population and would lead to a conclusion that banks
are themselves limiting the numbers of applications that are turned
down before they go through the process. As all banks are putting
companies through the same credit assessments the extent to which
a longer term trust relationship with a bank-manager can circumvent
this process is limited.
2.5 Similarly, because of the risks in the growth business
market, banks have tended to move away from the smaller turnover
businesses because this is an unprofitable and vulnerable segment
of the market.
2.6 The fact that entrepreneurs put in so much of their own
resources into financing their businesses at the start-up phase
means that they are inherently risk averse too. The number of
people saying that they felt there was no point in going to banks
because they were not lending increased between 2009 and 2010.
More worryingly, 85% say they have no need for finance, yet our
survey is of an exclusive group of growth-oriented founders of
businesses. If they are not looking for money and say that they
have the money themselves, this will limit the extent to which
they can grow over the long term.
3. CONCLUDING REMARKS
3.1 The evidence suggests that the systemic credit tightening
is having a more profound effect on demand for and supply of finance
to the small business sector. The concentration in the business
banking sector is less important than the fact that all banks
are using automated credit profiling processes which rely on external
credit scores, risk profile and firm contracts, rather than pipeline
and track record; criteria which are the same across the sector.
3.2 Lower turnover and younger businesses are proportionately
riskier and prices for banking services to this sector have inevitably
risen as banks increasingly price for risk. This is common across
all the firms operating in this market. Again, this is a function
of the market rather than a function of concentration.
3.3 The above two points mean that choice is limited to the
small business; they cannot select on the basis of a personal
relationship with a manager, because in the end this will not
be as important as the tighter credit control systems across the
sector in determining whether or not the business accesses finance.