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Kingston University Kingston Business School Faculty of Business and Law Kingston University Kingston Business School Faculty of Business and Law Bernard Owens Imarhiagbe SMEs and Access to Finance: An Investigation of Different Sources of Funding Submitted in partial fulfilment of the degree of Doctor of Philosophy November 2016 1 Abstract Access to finance is a necessity for the start-up, growth, innovation and survival of any organisation. As a result, access to finance has become an important theme in small business research. Although there is overwhelming research evidence on access to finance, there are still research gaps in the knowledge base of different forms of access to finance, especially in times of uncertainty and economic distress. Specifically, more research is needed on the identification of relevant theories of access to finance, the role of venture capital and crowdfunding, the effect of financial education and self-confidence on access to micro finance and the role of institutions in small firms financial liquidity. The thesis aims to fill these gaps and provide comprehensive reviews and new empirical evidence related to the above issues. Reviewing the academic literature, this research supports the view that venture capital and crowdfunding are both relevant in access to funding for firms as they represent worthy alternatives for different types of firms. Venture capital firms (VCF) have targeted their investment on later-stage, management buy-out and buy-in to limit their risks and increase returns. Although VCF traditionally have huge appetite for high risk and high returns, research show that they concentrate their funding on older innovative firms. In their risk aversion, VCF have become more stringent in their entrepreneurial project selection and monitoring with reduced funding of seed and early stage of projects. Turning to empirical parts of the thesis, a series of interesting and new findings have emerged. First, this thesis supports the view that financial self-confidence of the owner manager contributes to successful access to finance for UK firms whereas financial education is found to have weak explanatory power. However, financial education is found to increase financial self-confidence, and thus can be used as a means of improving access to micro-finance for SMEs. Self-confidence is also found to be affected by past poor performance of the owners’ credit outcomes stressing the importance of building a successful credit history and experience with the financial sector. Finally, at international level this thesis stresses the importance of regulation and institutions in Baltic States and South Caucasus countries in SME access to finance. The analysis points also towards some gender differences which add to the existing debate on differences between males and females. 2 Acknowledgements I would like to thank the following for their guidance and support throughout this research. First and foremost, Professor George Saridakis being my Director of Studies and First Supervisor. Professor David Smallbone and Professor Robert Blackburn are my second and third supervisors respectively. Their immeasurable guidance contributed to my conclusion of this research work. I thank the delegates at the Institute for Small Business and Entrepreneurship (ISBE) conference held at Cardiff City Hall in Cardiff, Wales on 12-13 November 2013. The ISBE delegates attended my Venture Capital (Conference Track: Business Creation, Early Stage Development and Business Closure) and Human Capital (Conference Track: Finance, Venture Capital, Taxation and Regulation) presentations at the conference and provided feedback afterwards to support further research work. I also thank Professor Colin Mason of the University of Glasgow in Scotland for his Venture Capital advice. All errors and omissions remain my own. 3 Table of Contents Abstract 2 Acknowledgements ................................................................................................................... 3 Table of Contents ...................................................................................................................... 4 List of Tables ............................................................................................................................. 8 List of Figures ......................................................................................................................... 10 Chapter 1 Introduction: SMEs and Access to Finance ......................................................... 11 1.1 Introduction ............................................................................................................. 11 1.2 Definition of SMEs.................................................................................................. 11 1.3 The Research Project ............................................................................................... 12 1.4 Methodology ........................................................................................................... 14 1.5 Structure and overview of this thesis ....................................................................... 15 1.5.1 Chapter 1 ............................................................................................................. 15 1.5.2 Chapter 2 ............................................................................................................. 15 1.5.3 Chapter 3 ............................................................................................................. 16 1.5.4 Chapter 4 ............................................................................................................. 16 1.5.5 Chapter 5 ............................................................................................................. 17 1.5.6 Chapter 6 ............................................................................................................. 18 1.5.7 Chapter 7 ............................................................................................................. 19 1.5.8 Chapter 8 ............................................................................................................. 20 1.6 Conclusion ............................................................................................................... 20 1.7 References ............................................................................................................... 23 Chapter 2 SME Access to Bank Finance ............................................................................. 25 2.1 Introduction ............................................................................................................. 25 2.2 The problems of information asymmetry ................................................................ 27 2.2.1 Collateral ............................................................................................................. 28 2.2.2 Relationship lending ............................................................................................ 30 2.2.3 Credit scoring ...................................................................................................... 31 2.2.4 Market intermediation ......................................................................................... 32 2.2.5 Law and regulations ............................................................................................ 33 2.3 Key theories for SME financing .............................................................................. 35 2.4 The financial crisis and its role in SME funding ..................................................... 38 2.5 Personal characteristics: ethnic minorities and female entrepreneurs ..................... 40 2.6 Government intervention ......................................................................................... 43 4 2.7 Conclusion ............................................................................................................... 44 2.8 References ............................................................................................................... 47 Chapter 3 Firm Growth: Access to Venture Capital Finance ............................................... 55 3.1 Introduction ............................................................................................................. 55 3.2 Main focus of the chapter ........................................................................................ 56 3.3 Background ............................................................................................................. 58 3.4 Conceptualisation of venture capital ....................................................................... 58 3.4.1 What is venture capital and private equity .......................................................... 58 3.4.2 Comparison between debt financing and equity financing .................................. 61 3.4.3 Expansion and exposure of venture capitalists .................................................... 63 3.5 Competitive business environment .......................................................................... 64 3.5.1 Competition among entrepreneurs ....................................................................... 64 3.5.2 Competition among venture capital firms ........................................................... 66 3.5.3 Geographical situation ......................................................................................... 67 3.6 Government and the law in venture capital funding ................................................ 69 3.6.1
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