Frontiers of Entrepreneurship Research
1997 Edition


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1Carole Singleton
1Nicholas Wilson
2Michael Peel

1University of Bradford Management Centre 2Cardiff Business School
Emm Lane, BRADFORD University of Wales
West Yorkshire, England, BD9 4JL Cardiff, Wales, CF1 3EU

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144-1274- 384308 144-1274-546866

Principal Topics
Bank relationships can be crucial to the development and growth of companies. Given the heavy reliance on banks for finance and the recent criticism of the UK banking sector, this study focuses attention on the relationship between small business owner-managers and their banks. It investigates the motivations to switch banks and profiles the characteristics of companies who had switched and those who were considering it. The study investigates why some firms who are dissatisfied with their current bank maintain the relationship, including consideration of their objectives and their perception of credit constraints.

This paper is based on a postal survey completed in 1996 resulting in a sample of 500 owner managed companies with turnovers under 2.5 million, in a broad range of industry sectors. The survey provides detailed information on the sources and frequency of use of external finance, data on objectives, growth patterns and performance, and characteristics of markets and products, with which to analyse differing financial structures and banking relationships. Logistic regression is used to identify the key variables which differentiate between those firms with satisfactory and unsatisfactory bank relationships.

Major Findings
The results show a high level of dependency on short term funding. 30% of respondents had had difficulty obtaining finance for growth and there was a strong positive relationship between this and satisfaction with their bank. There was evidence of a high level of dissatisfaction with the small firm-bank relationship and a perception of unfairness in the levels of interest rates and amount of collateral required. Firms which had switched to a new bank were generally satisfied and therefore showed similarities with those who had satisfactory relationships. Growth was an important factor in differentiating between firms who switched banks and those who remained dissatisfied, as was a propensity for change. Firms felt that banks should give them support and there was strong evidence to suggest that they considered the level of support too low.

The results suggest the continued existence of a finance gap. The implications for financing the small firms sector relate to the gap between small firms requirements and banks provision, not only in terms and availability of finance, but also in their role as a source of advice and support.

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Last Updated 04/25/98