Micro-credit in a UK context

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 it's 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.A key development of the study was to position micro-credit within a broader classification of informal financing options for small firms. The classification adopted, labelled quasi-commercial finance (QCOM), aids a clearer conceptualisation of provider-recipient interaction in the informal finance sector.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 which 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:•Whilst 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 firm’s 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 of 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 whilst 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 there may well exist an equity finance gap for certain firms.•Whilst 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:1.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.2.Accountants need to be able to recognise when their clients’ finance needs might be address effectively by a QCOM provider. They should also be able to effectively present not only information to satisfy financial (hard) criteria, but must also be able to present non-financial or soft criteria in a systematic and effective way.3.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 (who have a need for new equity risk capital)