Funding Environment in UK Essay

850 Words 4 Pages

HTSFs form 6% of UK’s business population. But, due to asymmetry of information, they face greater obstacle than conventional SMEs in obtaining finance, and so deserve greater government support in overcoming them. The recent financial crisis has affected the availability of finance to HTSFs in UK adversely, which in turn has held back economic recovery.

A lot of research has been done, which demonstrates that there has been a funding gap in HTSFs in last 30 years. According to Bank of England’s report on Financing of Technology Based Small Businesses, investors are more willing to lend to established HTSFs as compared to young HTSFs. This is due to opacity of information, as the borrowers have more information
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1. Studies in the United Kingdom suggest that HTSFs have always had high dependence on internal finance and trade credit, especially in initial and early stages. During 2007-10, 81% of firms obtained finance wholly or partly from internal sources, like personal funding, and retained profits. Out of this, 43% were solely dependent on internal sources.
2. During 2007-10, 53% of firms used formal sources of finance, often combined with internal sources. Funding was majorly required for working capital and research & development. Moreover, 10% of new businesses relied on informal external sources of finance, as compared to 2% established firms.
3. In 2001, only 7% of the HTSFs obtained their start up finance from banks. In UK, smaller businesses rely more on internal finance, while those requiring external finance opted for debt, rather than equity finance. Young HTSFs are more likely to approach banks for loans and overdrafts, business angels for equity finance and public sector for grants, as compared to venture capital and asset based funding.
4. In case of debt financing, banks were more stringent during the financial crisis, with only one-fourth of bank loans being successful. This was because of an insufficient trading record or collateral. Also, a lot of HTSFs rejected the loan offered to them due to high level of personal guarantee and costs associated with debt financing. However, 81% of

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