Frontiers of Entrepreneurship Research, 1995

Frontiers of Entrepreneurship Research
1995 Edition


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    FRONTIERS OF ENTREPRENEURSHIP RESEARCH 1995.


    SMALL BUSINESS MANAGERS' ATTITUDES TOWARDS AND USE OF FINANCIAL SOURCES

    Hans Landström
    Halmstad University
    Sweden

    Joakim Winborg
    Halmstad University
    Sweden

    ABSTRACT

    In many countries there is a discussion going on concerning "financial gap" for small firms. In this discussion the demand side of the problem is often neglected. Therefore, it is essential that research efforts are focused on empirical descriptions and analyses regarding financial decision-making in small firms. This study presents some preliminary findings concerning small business managers' attitudes towards and use of different financial sources. The study is based on a questionnaire to 903 small business managers in Sweden.

    The empirical results show, inter alia, that only a few small business managers actually experience a need for additional capital. Furthermore, small business managers seem to be positive in their attitudes towards internally generated funds and towards bank-financing. At the same time they show rather a lack of interest regarding other external financial sources. In theoretical terms the study confirms Myers' (1984) reasoning about a "pecking order approach", i.e., the small business managers prefer internal to external financing, and debts to external equity. However, the small business managers seem to adapt to the existing situation., and therefore we will suggest a "muddling through approach" as a complement to the "pecking order approach". In terms of policy-making the study will question the large efforts that have been made in many countries to increase the supply of capital to small firms.

    INTRODUCTION

    In many countries several empirical studies have indicated that small business managers experience problems in raising capital for the development of their firms. Different studies (e.g. Bolton, 1971; Wilson, 1979; Holmes & Kent, 1991) have frequently referred to the concept of a "financial gap", in order to explain why many small firms face this sort of problem. The explanation of the financial gap includes a supply side as well as a demand side. The supply side refers to the financier's propensity to supply projects and firms with capital, and many studies have with a supply side perspective sought for explanations to the "financial gap" (e.g. Barnea, et al., 1981; Pettit & Singer, 1985; Ronstadt, 1988). For example, it is well known that the relationship between the financier and the small business manager is characterized by information asymmetry. Due to this asymmetry it is argued that many financiers hesitate to finance small firms for several reasons. First, many financiers are assumed to consider the risk involved as being too high in relation to the potential return. Second, the financiers are considered to possess insufficient competence and financial tools in order to handle investments in small firms. Finally the financiers are assumed to consider the transaction and monitoring costs involved as too high.

    However, the explanation of the financial gap ought to give greater consideration to the demand side. The demand side refers to the small firms' need for financial resources, respectively the small business managers' interest in seeking external capital. When discussing the small firms' demand for capital it is essential to pay attention to some fundamental facts. First, one should be aware of the fact that the small firms constitute a rather heterogeneous group of firms, with very different needs for capital. Many small firms can be characterized as "livelihood" firms, for example the craftsman, the grocer's shop, etc., active in a local market without any major need for further external capital. Second, several small business managers have a very strong driving force to retain control of their firm. For many of them it is a life-time achievement, which they try to protect as long as possible. Admitting an external financier into the firm is therefore alien to many small business managers.

    Myers (1984) has tried to explain business managers' behaviour by using the "pecking order approach". According to Myers (ibid.) business managers prefer internal to external financing, and debts to external equity. This hierarchical "ranking" is due to the presumed fact that the relationship between the financier and the manager is characterized by information asymmetry. It is supposed that the manager has more knowledge about the real, experienced, value of the firm than the financier. This fact can result in undervaluation of the shares, and as a result the manager is supposed to use external equity financing only as a last resort. Holmes & Kent (1991) suggest that even if Myers' discussion of the "pecking order approach" is related to large listed firms, the reasoning is equally applicable to small unlisted firms. Several empirical studies have supported Myer's reasoning (e.g., Holmes & Kent, 1991; Norton, 1991a; 1991b; Scherr, et al., 1993). For example, Holmes & Kent (1991) found that owner-managers prefer internal funds, as this form of funding ensures the maintenance of the control over operations and assets. If debt financing becomes necessary the managers are assumed to favour short-term debt, as this source does not tend to involve any demand for collateral security.

    To summarize, it could be argued that our knowledge regarding the demand side of the financial gap is rather limited. As an attempt to increase our knowledge, we will in this study, describe the small business manager's attitudes towards and actual uses of different financial sources. Furthermore, we will try to identify different kinds of patterns in the small business manager's use of financial sources.

    EARLIER RESEARCH

    What do we know about small business manager's financial decision-making? In general it could be argued that modern financial theory has developed with large firms in mind, and it seems to be somewhat unsuitable if we intend to explain financial decision-making in small firms. In other words, it seems fair to argue that the modern financial theory has failed to consider the special financial problems faced by small firms. It could be assumed that small business managers either experience a different kind of financial problems than managers in large firms, or that they deal with the same problem in a different manner (Ang, 1991). In order to understand the financial decision-making in small firms, and on the basis of this understanding develop concepts and models suitable in the small firm situation, it is essential that we focus our research efforts on empirical descriptions and analyses of the small business manager's handling of financial decisions.

    According to Ang (1991; 1992) the small business manager's financial decision-making appears to be a product of the characteristics of the firm, and the manager's values and goals. For example, Barton & Matthews (1989) and Levin & Trevis (1987) argue that the firm's financial structure is a result of factors such as the manager's willingness towards taking risks, goals and ambitions. Barton & Matthews (ibid.) claim that small business managers prefer internally generated funds for the reason that they want to remain in control over the strategic decision-making in the firm, a behaviour which corresponds t Myers' (1984) discussion about "pecking order approach".

    Some studies have concentrated on how the characteristics of the firm affect the small business manager's financial decision-making. Olofsson (1994) focuses on the attitudes towards different financial sources among small business managers in Sweden. One starting-point in the study is that the attitudes towards different sources can be classified on the basis of the firm's size and the industry to which it belongs (firms in the manufacturing industry compared to the consulting industry). The results indicate, inter alia, that managers in consulting firms are managers were found to be more positive towards admitting new (part) owners into the firm; for example these managers were found to be more positive towards having a venture capital company as (part) owner. It is also interesting to note that a large number of the small business managers consider other firms in the industry and private individuals with an entrepreneurial experience to be of interest as (part) owners in the firm.

    Concerning the actual use of different financial sources in small firms, studies by Van Auken & Carter (1989) and Holmes & Kent (1991) show that the owners' savings and loans from the bank constitutes the manor sources used by small firms. Loans from family and friends were also found to be commonly used by the firms. When it comes to expanding the firm the major part of the capital was found to be contributed by the present owner/owners. One conclusion is that small firms seem to use just a few sources to finance their activities. these findings correspond with the results of the study by Olofsson (1994), in which it was found that internally generated funds constitute the most important financial source for small firms in Sweden, and that bank-financing is the most important external source.

    From these findings it seems obvious that the bank is a very important external financial source small firms, which could indicate that the bank does not doubt small firms in general. However, some studies (Ronstadt, 1988; Holmes, et al., 1994) have found that banks tend to discriminate against small firms in comparison with larger firms, which implies that some small firms are forced to search for alternative external financing. The use of alternative financing is shown in a study by Neeley & Van Auken (1994). They argue that "non-traditional financing", e.g., leasing, trade-credits, subsidies from government, venture capital, etc., is used to a large extent in small firm's start-up phase, and the use was reduced as the firm became more established.

    AIMS OF THE STUDY

    Because of our rather limited knowledge of the small business manager's financial decision-making the aims of the study will be to describe the small business managers' attitudes towards and the actual use of different financial sources, and to identify patterns of small business managers' use of different financial sources. This study is one of the first empirical studies in Sweden, which focuses on the small business managers' use of different financial sources (a similar study has been conducted by Olofsson, 1994).

    METHOD

    In this section the data gathering process and the variables used in the study will be described. The section will also contain a discussion concerning the limitations of the study, as well as a description of the sample.

    Data gathering process

    The original study was conducted during the spring of 1994, and is based on a questionnaire sent out to the CEO's in 1,200 firms 200 have up to 4 employees, and 1,000 5 to 99 employees. The imbalance between the two groups is due to the presumed fact that our research questions are more relevant to firms with at least some employees. The analyses in this study focus only on small limited firms (contrary to the original study which included all forms of association), which reduces the number of surveyed firms to 936. Of these 64 firms have up to 4 employees, and the rest (872 firms) 5 to 99 employees. The questionnaire was mailed to the CEO's in the firms, a reminder was sent out three weeks later. Ten questionnaires were returned by the postal services and 23 firms claimed that they were dependent firms belonging to larger companies, and they were all excluded from the analysis. The effective sample frame was thus 903 firms, and of these, 562 firms were not heard from, 21 firms sent back incomplete questionnaires or questionnaires that were not filled in, and 320 sent back usable questionnaires. Twenty-three firms (out of 872 firms) from the group with 5 to 99 employees, which means that the response rate is almost identical in the two groups. Accordingly, the total response rate is 320/903, i.e., 35 per cent. The analyses in the study are based on descriptive statistics, as well as on t-Tests and ANOVA-tests.

    Variables in the study

    The operationalization of the variables included in the study are shown in Table 1, in which the variables are divided into four subgroups. The independent variables describe characteristics of the firm and characteristics of the small business manager, while the dependent variables refer to the subgroups; attitude towards financial sources and use of different types of financial sources.

    Limitations of the study

    There are several factors which potentially restrict the conclusions which may be drawn and the generalization of the results. First, the most serious limitation is that there are a large number of non-respondents in the study, as the total response rate is only 35 per cent. There are also some questions in the questionnaire that were left unanswered. Second, the method of selection of firms used in the study means that there is an over-representation of "larger" small firms in the sample, compared to the population as a whole. Third, the study only surveys surviving firms. It can be assumed that small business managers in firms that have gone into liquidation may have different attitudes towards financial sources than managers in surviving firms. Finally, the study has all the weaknesses of a self-report study. For example, the respondents could be influenced by their perception of what seems to be a desirable response rather than stating the actual attitudes and use of different financial sources.

    Description of the sample

    The firms in the study are rather small in terms of number of employees and turnover. The mean number of employees per firm is 9 (median 7), and almost 70 per cent of the firms have less than 10 employees. Furthermore, the firms have a mean age of 20 (median 13). Thirty-eight per cent of the firms can be considered as young firms, i.e., less than 10 years old. However, on the whole we are facing rather mature firms in terms of development phase, with a stable turnover and market (60 per cent of the firms). Only 2 per cent of the managers state that their firms are in a seed phase, where the product/service has not yet been introduced on the market. Further, 14 per cent indicate that they are in a start-up phase, and the remaining 24 per cent of the managers state that they are in an expansion phase characterized by growth and increasing investments. The firms have a median turnover of 5,250 million SEK (=US$ 720,000), and the share of turnover exported is in general very low. For example, more than 70 per cent of the managers state that they do not export at all. Sixty per cent state that the growth rate in the firm's turnover during the period 1991-1993 has been low or very low, while 9 per cent declare that the growth rate has been very high. A majority of the managers (66 per cent) expect a growth rate of less than 10 per cent for the year 1994, whereas some 11 per cent of the managers are expecting a growth rate of 25 per cent or more. Further, the technology intensity among the firms in the study is not very high, which is shown by the fact that the firms, in general, invest few resources on R&D (as a share of turnover). Sixty-two per cent claim that they do not have any R&D at all, and solely 4 per cent of the managers state that more than 10 per cent of the turnover is used on R&D.

    > The firms in the study represent different industries. A large number of the firms (39 per cent) can be classified as trade and service firms, 18 per cent belong to the consulting sector, 17 per cent are manufacturing firms and 14 per cent are active in building and construction. Even with respect to geographical location the firms are well spread, ranging from small places (less than 10,000 inhabitants) to big cities (more than 250,000 inhabitants). The sample is characterized by an almost identical number of firms in each different location size.

    > The vast majority of the small business managers, 92 per cent, are men with a mean age of 47 (ranging between 23 and 71). The managers have a mean experience of 15 years as manager in total, and 11 years as a manager in the present firm.

    SMALL BUSINESS MANAGERS' ATTITUDES TOWARDS AND ACTUAL USE OF FINANCIAL SOURCES

    In this section the managers' attitudes towards and actual use of different financial sources are described and discussed. First, however, we present the context in which the descriptions are given.

    The Swedish context

    In Sweden, as in many other countries, measures to solve the financial gap problem for small firms have been under discussion for a long time. Until the beginning of the 1990s there was no actual financial gap for small firms. The banks were rather willing to take risks, and financed a lot of small firms (even young technology-based ventures). However, a sever bank crisis, which started in 1990, made the banks much more risk averse. Accordingly, it became much more complicated for the Swedish small business managers to secure the need for capital. Even if bank-financing was available to some firms the interest rate charged was rather unfavourable. In order to reduce the financial gap, the government responded with initiatives to improve the formal venture capital market. For example, the Swedish government created a new structure for venture capital companies, with a joint capital of 6.5 billion SEK (=US$ 890 million). Furthermore, the amount of capital in the form of government subsidies has increased during the last few years in Sweden. However, it can be questioned whether the initiatives from the government hitherto have solved the financial gap for small Swedish firms.

    Attitudes towards different financial sources

    The managers' attitudes towards different financial sources were measured by confronting the managers with a number of statements regarding different financial sources. The managers were asked to indicate their attitudes to these different statements. First of all, the results imply that a majority (63 per cent) of the managers are negative towards selling any shares of the firm, due to a fear of losing control over the firm. These negative attitudes towards external equity financing seem to be strong, as 82 per cent of the managers would rather refrain from expanding their firm if this expansion involved admitting new external owners into the firm. Sixty-seven per cent would prefer to finance an expansion with debt capital, instead of equity capital from a new owner.

    > The banks are an important financial source for small firms. Therefore, it is essential to examine small business managers' attitudes towards the banks. the results show that the small business managers in general have positive attitudes towards banks as a financial source. Sixty-two per cent of the managers consider that a bank loan is an appropriate financial form, and almost as many believe that the bank can provide more than just money. However, when it comes to the attitudes towards the bank officials' "small firm competence" the results are not so consistent, as some managers indicate that they dislike the present situation. Furthermore, 44 per cent of the respondents claim that the solutions presented to their problems always come in a standardized and not very useful way. Only 8 per cent of the managers state that the bank officials present proposals that are helpful in running the firm. These facts are rather notable and could be seen as a result of the bank officials lacking a sufficient and active relationship to their customer firms (Svensson & Ulvenblad, 1994), or that the small business managers do not possess a sufficient linguistic ability which makes it difficult for them to make sense of the advice given (Johannisson & Landström, 1994).

    > Finally, the managers' attitudes towards other financial sources, such as internally generated funds, venture capital companies and government subsidies, imply that the vast majority of the managers (80 per cent) emphasize the importance of financing the development of the firm with internally generated funds to the greatest possible extent. With the positive attitudes towards internally generated funds in mind, it is not surprising that only 15 percent of managers would consider it positive to have a venture capital company as (part) owner in the firm. The attitudes towards government subsidies and support are rather mixed, as only 32 per cent of the managers claim that government subsidies are important for the development of the firm.

    Use of different financial sources

    During the last few years the debt/equity ratio of small Swedish firms have been reduced. This is considered to be due to higher profitability in the late 1980s, together with altered account and tax regulations (Gandemo, 1994). The firms in this study are no exception to the above fact concerning the debt/equity ratio. The mean balance-sheet per firm consists of 43 per cent equity capital (median 25 per cent), 28 per cent long-term debts (median 20 per cent) and 29 per cent short-term debts (median 25 per cent).

    The study shows that the actual use of different external financial sources is characterized by a heavy reliance on bank-financing and on trade-credits. Forty-one percent of the firms use bank-financing to a large extent, while 26 per cent use trade-credits to a large extent. Some financial sources are used to a limited extent, for example leasing companies, customers and government subsidies. Finally, some financial sources are used by very few firms. Capital from family and friends are used to some extent by 10 per cent of the firms, venture capital companies by 5 per cent, and business angels by 3 per cent of the firms. The figures in Table 2 imply that small firms in Sweden rely on "informal" financial sources, e.g., family and friends, and business angels to a lesser degree than their counterparts in, for example, the US (Van Auken & Carter, 1989; Neeley & Van Auken, 1994).

    PATTERNS AMONG USERS OF DIFFERENT FINANCIAL SOURCES

    In this section we will present an analysis of the characteristics of the firms and the managers using different financial sources to a large and to a limited extent. The purpose is to identify differences between high and low users of several financial sources.

    Users of bank financing

    The banks constitute a very important external financial source for small firms. It is evident from Table 2 that as many at 86 per cent of the small firms are financed by the bank, to at least some extent. As can be seen in Table 3, characteristics of the firm such as size, industry and geographical location seem to influence the use of bank financing. In some industries (e.g., consumer manufacturing and hotel/restaurant) bank-financing seems to be used to a relatively large extent, whereas in others (consulting) it is used to a relatively low extent. This can be due to differences in the asset structures of the firms, and hence different possibilities to provide the bank with collateral security. Firms located in villages use the bank to a larger extent compared to firms in big cities, which may be explained by the proximity and accessibility of local bank offices in Sweden. Furthermore, the relatively high use can be a result of the manager's limited knowledge regarding financial alternatives. Finally, the fact whether or not the manager expects an expansion of the firm during the coming year seems to influence the relative use of bank-financing. Managers that are expecting an expansion are already relatively high users, whereas the ones not expecting an expansion are relatively low users.

    > Furthermore, as shown in table 3 the use of bank-financing seems to be associated with the small business manager as an individual. For example, male managers are to a higher extent financed by the banks than females. This does not necessarily imply that the banks discriminate against female managers in their granting of loans; instead it may reflect the fact that men more often start their firm in capital intensive industries. Further, the results imply that small business managers using bank-financing to a large extent are more unifocused, i.e., tend to focus on one single solution to a problem instead of on many solutions when making decisions. Finally, the ones using the bank to a relatively high extent show more positive attitudes towards the banks in general and towards the bank officials' competence, in comparison with the managers who use bank-financing to a lesser extent.

    Users of other external financial sources

    From Table 2 it can be seen that, besides the bank, trade-credits constitute a rather important external financial source for small firms. The results in the study indicate that the use of trade-credits is associated with the characteristics of the firm. The relative use of trade-credits is explained by variables such as size, export share, industry and planned growth during the coming year. For example, trade-credits are more used in firms operating in the manufacturing, building/construction and trade/service industries, in comparison with firms operating in the consulting industry. Furthermore, firms in which the manager states a planned expansion during the coming year make relatively high use of trade-credits, whereas the small business managers that are not expecting an expansion make relatively little use of this financial source.

    >Table 2 shows that only a minority of the small business managers use other financial sources than bank-financing and trade-credits to any great extent. All the same it can be of interest to raise the question: "What characterizes the firms that make use of "uncommon" financial sources, such as financing from customers, venture capitalists and family and friends?" Since only the significant differences will be presented it is important to note that the significance value generally is very sensitive to the sample size. Because of the small number of firms using "uncommon" financial, it is not possible to expect too many significant results. All the same, our analysis indicates some interesting patterns.

    For example, it is interesting to note that the more R&D intensive firms seem to be financed by their customers to a relatively large extent. Thus, in many cases the customer will pay for the development work of new products, and this seems to be an important financial source for the "technology-based" firms. Most of the firms with a large share of customer financing are located in big cities, which presumably is connected to the fact that most of the R&D intensive firms are located in metropolitan areas. The small business manager's age and experience also seem to be of importance. R&D intensive firms tend to be launched by older entrepreneurs, and it may in fact require a well established "trust- relationship" to obtain financing from customers.

    Managers that are expecting an expansion are using sources such as government subsidies, venture capital companies and business angels to a much larger extent than the managers who are not expecting an expansion. Furthermore, even though the difference is not significant, the managers expecting an expansion show more positive attitudes towards obtaining finance from a venture capital company than the managers not expecting an expansion.

    As far as further analysis is concerned it is very difficult from the variables used in this study to identify any clear patterns in the small business manager's attitudes towards and actual use of different financial sources. However, there are some indications implying a connection between the branch of industry and the use of government subsidies. Firms in the manufacturing industry seem to use government subsidies to a larger extent than firms active in other industries, which may be explained by the fact that the largest employment effects are to be found in the manufacturing industry. It is also interesting to note that there are no particular categories of firm (e.g., R&D intensive firms and/or younger firms) or categories of small business managers (e.g. managers with a high risk propensity) which to a larger extent than others use venture capital companies or business angels as financial sources, as could have been expected from earlier studies. Finally, the results in the study indicate that managers who use "uncommon" financial sources experience a lack of sufficient capital in order to manage the firm without complications. Therefore, it can be of interest to compare the group of managers stating a need for external capital with managers who do not experience any capital problems.

    FIRMS WITH A NEED FOR CAPITAL

    In the present section a comparison is made between respondents who state a lack of capital in order to manage their firm without problems, and respondents who do not experience any lack of capital. First of all, the vast majority of the managers claim that they do not need additional capital in order to finance the firm. The study shows that solely some 27 per cent of the managers are in need of additional capital in order to manage the firm's activities without complication. When it comes to the amount needed it can be considered as rather small, at least in real terms (in median 0.5 million SEK, i.e. = US$ 68,000). If we relate the need to the firm's turnover the mean need per firm corresponds to 14 per cent. In more than 70 per cent of the firms stating a need for further capital the need constitutes less than 20 per cent of the actual turnover.

    What characterizes the firms demonstrating a capital need in comparison with the ones which do not need any additional capital? The analysis shows that it is hard to identify any significant differences regarding the characteristics of the firms and their managers. This holds especially for the characteristics of the firm. For example, no significant differences were found regarding type of industry. One might for example expect that highly R&D intensive firms would be in a relatively greater need of further capital. However, only the firm's development phase proved to be significant. Thus, firms in early phases suffer to a larger extent from undercapitalization than firms in later phases.

    If we concentrate on the characteristics of the small business manager, the results imply that managers in need of further capital differ in their attitudes towards financial sources from managers arguing that the firm has enough capital. This difference is present even when it comes to the use of different financial sources. For example, managers stating a lack of capital are more positive towards using external capital, are more willing to take risks and use a more multifocused decision-making style (which means that in different situations a couple of alternative solutions are sought, in order to solve an emerging problem). Furthermore, the results indicate that managers claiming a need for capital use the financial sources: bank, suppliers, leasing companies, factoring companies, venture capital companies and business angels to a far greater extent than managers stating no need for additional capital. This relatively high use of external sources of course results in a higher debt/equity ratio.

    It seems fair to conclude that the actual situation in the firm has a great impact when it comes to the manager's attitudes towards financial sources. For example, a lack of capital seems to make the manager more positive towards different external sources. In other words, the small business managers seem to adapt to the existing situations.

    The firms with a need for further capital can be classified into two groups, based on the underlying reason for the need. The first group, including almost 50 per cent of the small business managers, indicate a need due to a contraction of the firm, such as weak profitability (e.g., "a stagnating market", "lack of orders" or "low prices on the market"), lack of available funds or unfavorable financial conditions (e.g., the need is due to a planned expansion. In most cases the respondents have not specified what the expansion refers to, but some managers refer to reasons such as "investments in equipment", "initiation of a new activity/business", "releasing a new product" or "entering a new market".

    Are there any differences between the group of managers stating contraction as a reason fro the capital need compared to the group indicating expansion? In table 4 the differences between the groups are summarized.

    The results in Table 4 indicate that some industries, such as construction, hotel/restaurant and consulting, have faced relatively more problems (leading to contraction). By contrast it seems that firms in manufacturing have had a more positive development (expansion). A high level of R&D appears to be associated with an "expansion-based" capital need, as a majority of the highly R&D intensive firms show this kind of need. Furthermore, managers stating expansion as the reason for the need show a higher use of bank-financing and also more positive attitudes towards the bank as a financial source. When it comes to the use of other financial sources there are only minor differences between the two groups. However, a tendency (still not significant) is that firms with contraction problems use factoring and trade-credits to a relatively larger extent, while the firms with an expansion-based capital need show a greater use of subsidies from the government and financing from customers (payment in advance).

    CONCLUSIONS

    In this section the empirical results in the study will be summarized, and some theoretical conclusions will be drawn.

    As in many other countries, large efforts have been made in Sweden to increase the supply of external capital to small firms. However, the study shows that rather few small business managers actually experience a need for additional capital. Furthermore, in many cases the need for capital is due to negative problems or crises in the firm. The empirical results in this study also indicate that small business managers in Sweden to a very large extent use internally generated funds in order to finance the firm's activities. At the same time bank-financing seems to be the major external financial source used in the small firms. Finally, the small business managers show a rather great lack if interest in other external financial sources, especially financial sources which consist of external equity capital (for example from venture capital companies). Against this background the government's focus on the supply of capital in order to support small firms can be questioned.

    Some additional empirical findings regarding small business managers' attitudes towards and use of different financial sources can be summarized in the following way:

    * Small firms in Sweden seem to rely heavily on bank-financing and on trade-credits. On the other hand, family and friends, factoring companies, business angels and venture capital companies are used to a very limited extent.

    * The use of bank-financing seems to be associated with the type of industry the firm is active in (asset intensive industries compared to personal intensive industries) and with the firm's geographical location (firms in villages compared to firms in larger cities).

    * An important financial source for R&D intensive firms seems to be their customers, i.e., the customers pay for the development of new products.

    * Rather few small business managers consider that they need additional external capital in order to manage the firm without any problems. It is interesting to note that managers stating a need for further capital are much more positive in their attitudes towards using external capital, tend to be more willing to take risks and already make more use of different financial sources, such as the bank, suppliers, venture capital companies and business angels, in comparison with managers who have no need for additional capital. In other words, it seems as if the small business managers adjust their attitudes and behaviour to the existing situation.

    * The firms with a need for capital were classified into two groups, based on the reason behind the capital need. The two reasons identified were expansion and contraction. The managers stating expansion as the underlying reason were found to be much more positive in their attitudes towards banks in general, towards the bank officials' competence and towards the advice given to small firms, in comparison with the managers indicating contraction as the main reason. Furthermore, the managers stating expansion as the reason already use the bank to a relatively higher extent.

    In theoretical terms the study confirms Myers' (1984) reasoning about the "pecking order approach". In other words, the small business managers seem to prefer internal compared to external financing due to fear of losing control of the firm.

    However, the small business managers seem to adjust to the existing situation. for example, when financial problems arise in the firm, the small business managers' attitudes and behaviour change. Their attitudes towards external financial sources become more positive, they show a greater willingness towards taking risks and finally they seem to use a more multifocused decision-making style. Against this background we would like to suggest a "muddling through approach" in order to explain the small business managers' financial decision-making. This approach should be seen as a complement to Myer's (1984) "pecking order approach".

    The "muddling through approach" is based on Lindblom's (1959) ideas that decision-makers may change goals and means, and develop a number of decision alternatives in order to muddle through a decision in the actual situation. The main principle is that successive adaptation is taking place, and the decision is developed in a "zig zag" rather than in a straight-line process.

    The "muddling through approach", in this study, starts out from the assumption that small business managers are strongly action-oriented in their way of proceeding, and that they acquire knowledge through concrete experiences. Furthermore, the small business manager's attention is considered to alternate between vision and concrete action (Johannisson, 1991). I other words, the goals and the means are continuously developed and changed on the basis of gained experience. According to Normann (1975) this adaptive behaviour is very suitable in situations where the environment is rather complex and changeable, which corresponds rather well with the results in this study.

    ACKNOWLEDGMENT

    The authors wish to acknowledge the invaluable research assistance of Nils Persson.

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