SME Access To Finance Survey: 2019

1. Introduction and background

1.1 Background to the survey

The Scottish Government commissioned its first survey of SME finances in 2007,^[2] as part of a consortium of organisations across the UK, to better understand the requirements, usage and experiences of SMEs in accessing finance. The survey, undertaken prior to the onset of the 2007/08 financial crisis, provided a useful baseline against which to compare the post-crash situation. In 2009, the Scottish Government commissioned its own SME Access to Finance Survey, with follow-up surveys conducted in 2010 and 2012,^[3] to monitor the impacts of the financial crisis on SMEs' use of and ability to access finance. The survey was then rested over 2013 - 2018. During this time, access to finance conditions for SMEs in Scotland were monitored through the Longitudinal Small Business Survey.^[4]

The SME Access to Finance survey was reinstated in 2019 to assess the extent to which SMEs' financing patterns had changed at a time when the economy and financial landscape was significantly different to when the first surveys were undertaken. The survey was undertaken over November 2019 to January 2020, prior to the outbreak of the Covid-19 Coronavirus pandemic in Scotland.

This report sets out the findings of the 2019 survey. It provides evidence on the experiences of SMEs in accessing finance at the time the survey was undertaken and also provides a baseline for monitoring the impacts of the UK's exit from the EU in January 2020 and the onset of the global Covid-19 Coronavirus pandemic in March 2020.

Chapter 2 outlines the survey methodology while chapter 3 provides a brief overview of the state of the Scottish economy and the SME lending landscape in the UK and Scotland when the fieldwork was undertaken. Chapter 4 examines the use of finance of SMEs, considering the types and levels of finance use, drawing on both the survey results and external sources. Chapter 5 considers SMEs' demand for finance, drawing on the survey results and external sources while chapter 6 considers SMEs' attitudes to using external finance and the reasons SMEs do not seek finance. Chapter 7 outlines the survey results on the outcomes of SMEs' applications for finance, considering their experiences over both the three years and 12 months prior to the survey. Chapter 8 considers the extent to which access to finance and other issues present a problem to SMEs and the impact of recent bank branch closures. The final chapter, 9, outlines the survey results on SMEs' abilities in applying for external finance and use of external advice.

Where appropriate and possible, the report outlines differences in results by business size, sector, firm type (exporter, new start, high growth) and location and provides comparisons with previous years' survey findings.

1.2 The role of SMEs and access to finance in the Scottish economy

SMEs play an important role in the Scottish economy, accounting for 99 per cent of all private sector businesses and over half of private sector employment in Scotland.^[5] They contribute to employment and can drive competition and innovation which in turn drive productivity, dynamism and, ultimately, growth in the economy.

The use of external finance can support SMEs to establish, invest, innovate and grow. A lack of finance can cause cash flow problems, negatively impacting business survival rates, and hold businesses back from reaching their growth potential.^[6] It is therefore important to understand whether the market for SME finance in Scotland is working correctly and providing finance to viable businesses with viable propositions.

1.3 Market failures in SME finance markets^[7]

Finance markets may not always deliver efficient outcomes with the result that some viable or potentially viable businesses may be refused finance, negatively impacting economic growth. This is what is referred to as 'market failure'. Market failure in the SME finance market is most frequently associated with the problem of 'information asymmetry'. This occurs when prospective borrowers have more information about their financial viability than lenders but cannot provide lenders with sufficient financial track record or tangible collateral as security. This tends to affect certain types of firms, particularly early stage, pre-revenue, innovative and high growth potential firms. These information failures may become exacerbated in uncertain economic conditions as lenders become more risk adverse. Such firms may also receive less finance than is optimal as investors only consider the private benefits of investing in these businesses whereas the wider social benefits may be greater. This is due to the potential 'spill over' effects that new and innovative businesses can deliver to other firms in the economy through innovation and knowledge transfer.

Whilst these market failures relate to the supply (lender) side, market failures can also occur on the demand (borrower) 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.