SME Access To Finance Survey: 2019

8. Abilities in applying for finance and use of external advice

Summary

• Just over half of SMEs felt confident in their understanding of the different forms of external finance available to the business. SMEs felt more confident in their ability to put together an application to obtain finance from their main bank than other providers. This echoes the results in chapters 4 and 5 that most SMEs rely on the their main bank for most of their finance needs and indicates there may be a need to improve SMEs' understanding of the range and benefits of the various financial products and providers available.
• Just over a third of SMEs sought external advice when considering or applying for finance and the most common sources of advice were the business's accountant/financial adviser and their main bank, suggesting there may be a need to encourage greater use of independent external advice.

As discussed in section 1.3, market failures can occur on the demand side which mean that businesses do not seek an optimal amount of external finance. This may be due to businesses failing to fully understand the benefits of using external finance, how to access the variety of external finance available, or which type might be most suited to their situation. Businesses may also lack the skills to present their propositions to provide lenders with a full understanding of their viability. To obtain an understanding of the extent to which these kinds of issues are at play amongst Scottish SMEs, a number of new questions were added to the 2019 survey. The results are presented for SMEs as a whole and also, where possible, for key sub-groups of interest including size band, sector, business type (high growth/exporter/new start) and location (urban/rural).

8.1 Abilities in applying for finance

Just over half of SMEs felt confident in their understanding of the different forms of external finance available to the business. SMEs felt more confident in their ability to put together an application to obtain finance from their main bank than other providers

Over half (57 per cent) of SMEs felt confident in their understanding of the different forms of external finance available to their business. Confidence increased with business size, with small and medium sized businesses more confident than average (Table 3).

Exporters (66 per cent) and manufacturing firms (76 per cent) were also more confident than average in their understanding of the various finance types available to them.^[96] The results by location were in line with the all-firm average.

Base: All SMEs, 1003 (0-9 employees n=494; 10-49 employees n=387, 50-249 employees n=122)

SMEs as a whole were more confident in their ability to put together an application to obtain finance from their main bank (73 per cent) than other providers (61 per cent), echoing the results in chapters 4 and 5 that most SMEs rely on the their main bank for most of their finance needs. Small and medium-sized businesses were more confident in their abilities in putting together applications than the all-firm average.

Exporters were also more confident than average in their abilities in putting together an application to obtain finance from their main bank (83 per cent) and from other providers (70 per cent).

By sector, firms in the wholesale/retail sector (62 per cent) were less confident than average in putting together an application for their main bank. In terms of applications for other providers, firms in the agriculture sector (45 per cent) were less confident than average, reflecting while firms in the business services sector (75 per cent) were more confident.^[98]

Looking at the findings by location, rural firms were less confident than average in their abilities in putting together an application for their main bank (65 per cent) and from other providers (47 per cent), reflecting the results on the lower confidence of the agriculture sector, prevalent in rural areas, in applying for finance. While rural SMEs were less confident in putting together an application, they were more likely than average to receive the full amount of finance sought (see section 7.3.6).

8.2 Use of external advice

Just over a third of SMEs sought external advice when considering or applying for finance and the most common sources of advice were the business's accountant/financial adviser and their main bank, suggesting there may be a need to encourage greater use of independent external financial advice.

Around a third (36 per cent) of SMEs that considered or applied for external finance in the last three years sought external advice^[99] (Figure 28). The proportion of medium-sized firms that sought advice (62 per cent) was almost twice the all-firm average.^[100] High growth firms (57 per cent) and rural firms (49 per cent) were also more likely than average to seek advice. Looking at the sectors, firms in the manufacturing (65 per cent) and agriculture (61 per cent) sectors were more likely to have sought advice while firms in the construction sector (13 per cent) were less likely than average to have sought advice.

The most common source of external advice was from the business's accountant/ financial adviser, cited by 47 per cent of SMEs who sought external advice, followed by the business's main bank (25 per cent). These two sources were the top two most common across all business size bands. Only nine per cent sought advice from Public Bodies such as Business Gateway, Scottish Enterprise and Highlands and Islands Enterprise. Looking at the results by location, the most common sources of advice for urban firms were accountant/financial adviser (54 per cent), public bodies (13 per cent) and main bank (12 per cent) whilst the most common sources for rural firms were their main bank (44 per cent), accountant/financial adviser (36 per cent) and 'other' (11 per cent).^[101] For rural firms, this underlines the findings around the importance of a local branch to their business.

Base: SMEs who sought external advice, 212
Multiple answers allowed across this question.