For a long time researchers and policy-makers have been
discussing the financial problems facing small businesses. It has
been argued that small businesses face severe problems in
attracting external long-term capital. Researchers and
policy-makers have assumed that these problems are due to a
limited supply of capital. Therefore, most of the research within
small business finance has started from the supply side. In this
context financial problems in small businesses have been
explained by reasons such as (Storey, 1994); (i) the information
asymmetry experienced by the financiers, (ii) the high risk
involved in financing small businesses, and (iii) the relatively
high transaction and monitoring costs involved. Earlier research,
focusing the supply side, seem to have started from a
"calculative capital logic" (Sjöstrand, 1992), in
risk, information asymmetry, return on investments etc. are key concepts. In the calculative capital logic the capital is seen as the means guiding all exchanges between parties. Within this framework finance seems to be considered from a rather narrow point of view, usually focusing on the capital as such.
The interest in the demand side of small business finance has recently begun to emerge (Cressy et al., 1996). Empirical studies have for example shown that internally generated funds are the financial source most used in small businesses, and that banks are the major external financial source (see for example McMahon et al., 1993; Olofsson, 1994; Landström & Winborg, 1995). In most cases these findings have been explained using Myers´ (1984) reasoning about a "pecking order framework", which implies that managers are guided by a pecking order when choosing among financing opportunities. Internal financing is assumed to be preferred to external financing, and short-term external sources are considered to be preferred to long-term external sources (Holmes & Kent, 1991; Norton, 1991; Scherr et al., 1993).
However, as we see it, there is a danger that the research focusing on the demand side starts from the same "calculative capital logic" as the supply side research. Some implicit assumptions indicate that this could be the case. For example, it is assumed that small businesses are lacking capital, that the need for resources are handled using traditional institutional financial sources, such as banks and venture capital companies, and that small business managers are guided by a pecking order when choosing among financing opportunities, originating from an information asymmetry between the financier and the business manager. In our opinion (see also Gibson, 1993; Colot & Michel, 1994) many small business managers handle the need for resources in another way than proposed by the calculative capital logic, which with few exceptions has not been observed in earlier research regarding small business finance. In order to illustrate our proposition we present a case:
Case: Lars Andersson Engineering Ltd
Lars Andersson is owner/manager of Lars Andersson Ltd, a small business developing a new technique for fuel injection for cars. However, the technique can be applied in other areas as well. Using this new technique other kind of fuel than petrol could be used. The initial development work, which started in 1985, was financed by means provided by Lars from other business assignments. In the beginning of 1990 prototype tests were undertaken, showing very satisfactory results.
The new technique was planned to be introduced on the market during 1994. The market introduction required a large amount of additional resources, human, physical and financial. Lars experienced great problems in attracting external long-term capital in order to meet the need for these resources. Several banks and one venture capital company were very reluctant to finance the project. In other words, there was not enough external capital available on the market for projects of this kind. To conclude, Lars was left with no capital for the coming market introduction and the business very close to going bankrupt. However, two years later, in 1996, the business has grown to a size of 15 employees. Even though the business has developed more slowly than planned, the technique has been introduced on the market and the expansion has begun. The business has developed without any major contributions from traditional institutional financial sources, such as banks and/or venture capital companies.
The case shows that Lars Andersson developed his business
without major contributions from banks and/or other institutional
financiers, and that he has focused his attention on the
resources needed not on the capital as such. This raises one
fundamental question: "How is it possible to meet the need
for resources in a small business without using institutional
As we see it, when elaborating upon the question raised above we must depart from the small business manager´s own logic (see for example Johannisson, 1992). From the small business manager´s point of view, capital or "money" is not important per se, but rather the resources needed in the business. This implies that we need to broaden the focus when discussing small business finance, from the rather narrow "capital" focus to a focus encompassing the resources needed. In this extended context concepts like networks, strategic alliances, use of resources, cooperation, trust etc. may become central.
The emphasize on businesses´ resources is in line with the renewed interest in the resource-based view or theory, originating from the works of Penrose (1959) and Wernerfelt (1984). The resource-based theory provides an attempt to generate an understanding of the way resources in the business are applied and combined. According to the resource-based theory a business´ competitive advantage is anchored in the business possession of idiosyncratic costly-to-imitate resources. On the basis of the business´ resource configuration strategy is choosen in order to achieve a sustainable competitive advantage (Barney, 1991). The theory has been applied in several studies focusing large businesses, however much less attention have been given to the situation in small businesses (Borch et al., 1997). Therefore, it can be argued that we need to increase our understanding of how resources are created and used in small businesses.
Trying to explain the case illustrated above we can consider Lars Andersson as a genuine "financial bootstrapper". With the concept "financial bootstrapping" we refer to measures used in order to meet the need for resources, without using long-term external capital from banks and/or new owners. Our definition is rather influenced by Freear et al. (1995), who define bootstrapping as "creative ways of acquiring the use of resources without borrowing money or raising equity financing from traditional sources". As was shown in the case above the use of bootstrapping measures can be explained by a constrained access to capital from institutional sources, or by a desire to maintain the control over business operations (Bhide, 1992). Most probably financial bootstrapping is a rather common way of running a small business. All the same, our knowledge concerning its use is limited, the works of Freear et al. (1995) and Bhide (1992) being exceptions.
Against this background several questions emerge; "What bootstrapping measures are used in small businesses?", "Can we categorize different bootstrapping measures into groups of measures?", "Can we identify any clusters of businesses using different kinds of bootstrapping measures" and if so "Can we identify any explanations to the clusters found?" In this study these questions will be further elaborated upon.
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Last Updated 02/19/98