Presentation. Samuel Mwaura, Sara Carter , Finance and household influences on the growth of micro -enterprises.

1. Finance and household influences
on the growth of micro-enterprises
Supporting micro-enterprise growth: ambition, family and finance
CDFA workshop
13 March 2014
Sara Carter and Samuel Mwaura
Sara.carter@strath.ac.uk
Samuel.mwaura@strath.ac.uk
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2. Micro-enterprise in the UK
• 1971 - 820,000 small firms in the UK
• 2008 - 4.26 million businesses
• 2012 - 4.8 million businesses
Half a million new businesses since the recession
• Despite… significant reductions in public sector
employment
• Growing employment since 2009
• Mostly self-employment
(Lord Young Report)
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3. The vital 95% (?)
• 2012
 95.5% (4.6 million) of all UK enterprises micro-
firms (0–9 employees).
 32% of private sector employment (7.8
million)
 20% of private sector turnover.
(Lord Young Report)
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4. Micro-enterprise in the UK
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5. Micro-enterprise in the UK
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6. The vital 95% (?)
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7. Drivers of growth
• Growth important, beyond mere entry
• But… How to engender growth?
• Young report (3Cs)
Confidence – in the economy but
entrepreneurs must have confidence in
themselves (ambition)
Capability – skills (management)
Coherence – government support and policy
towards entrepreneurship should be
comprehensible, trustworthy and easily found
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8. Drivers of growth
• Entrepreneurship literature (3Ms)
Money, Markets, Management (Bates et al, 2007)
• Women’s entrepreneurship (5Ms)
Motherhood, Meso/Macro environment
Meso – intermediate/ regional support
Macro – economic policy, culture, legal
environment
(Brush et al, 2009)
• 6Ms - How about entrepreneurial “mojo”?
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9. Ambition
“It is self-evident that if entrepreneurs do not
intend to grow their businesses, their businesses
are less likely to grow. Achieving growth is
difficult and demands effort, and if the effort is
not there, growth is less likely to materialise. But
are the chances of business growth any greater
for entrepreneurs who intend to grow their
business?”
(Levie and Autio, 2013, p9 - ERC White paper)
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10. Ambition
• “Quality” of entrepreneurship more important for economic growth
than “quantity” of start-ups or self-employment (Levie and Autio,
2013)
• Back to “the vital 6%”?
• Other research:
 “Innovation orientation” has a higher impact on firm performance than
innovation inputs (R&D) and innovation outputs (new products)
(Rosenbusch et al, 2011).
 “Written strategy” (Hadjimanolis, 2000)
• Key take-away: ambition not blind ambition or delusion.
• It’s about harnessing a battery of other productive
aptitudes and resources to enhance firm performance
• Also, when written down… becomes a better articulated
and considered plan, hence higher likelihood of success.
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11. Family
• All entrepreneurs embedded in the family
(Aldrich and Cliff, 2003)
• Family norms, attitudes and values
 Family role models (e.g. Parker, 2009)
• Founding teams usually family members (Ruef et
al, 2002)
• Family key for resources and (moral) support
 Free or low cost labour, knowledge, other capital
 Spare resources used to diversify family business portfolio (as
one entity) (Alsos et al, 2014)
 Low risk “bricolage” within home-based businesses
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12. Home-
based
businesses
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13. Family
• Family transitions and lifecycle influence start-up,
growth and business lifecycle (e.g. Alsos et al, 2014)
 Young children – flexible occupation
 Kinship extension (through marriage) – new resources
and new business activities
 Departure (children moving out, retirement, death, etc)
• Family/ household dynamics affect business
performance and growth
 Women: motherhood, household tasks, mobility –
narrowly tethered businesses (Brush et al 2009; Nichter
and Goldmark 2009)
• Business systems affect family systems – including
norms, attitudes and values (e.g. first in the family to
start a business role-modelling for later generations)
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14. Family
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15. Finance
• Access to finance the most significant barrier entrepreneurs face
 Especially ethnic minority businesses (Ram and Jones, 2008; Ram et al,
2002; Fraser, 2009)
 Women (Marlow and Patton, 2005; Hughes et al., 2012; Roper et al.,
2006; Roper and Scott, 2009)
• However:
 Is due to outright discrimination by banks? (Hertz, 2011; Carter
et al, 2007)
 Is it structure? i.e. enterprise age, size, sector, ownership status
(Watson, 2002; BDRC, 2012; Marlow, 2012)
 Or gendered structure? e.g. women more likely to be sole-
proprietors in social services, restaurants, etc (Wu and Chua
2012)
 Is it debt avoidance? (Cliff, 1998; Bird and Brush, 2002)
 Or discouragement (Kon and Storey, 2003; Han et al, 2008))
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16. • Traditionally, only two groups of borrower
types: applicants and non applicants
• Within this context, issues included:
• Non-applicants
Demand side risk-aversion
No need
• Applicants - Rejection
Outright discrimination?
Credit rationing?
Structure and creditworthiness?
Finance
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17. • Since Kon and Storey (2003) “discouraged borrowers”
became a big finance issue
“A good firm, requiring finance, that chooses not to apply to
the bank because it feels its application will be rejected”
• Emergent evidence:
Discouraged smaller, riskier and younger (Chandler, 2010;
Han et al, 2008; Chakravarty and Xiang, 2012)
Other factors: sector, firm strategy, experience, perceived
quality of existing banking relationships
Also: gender and ethnicity (Freel et al, 2010; Fraser, 2009).
Fear of rejection highly ethnicised – 4% of White firms
compared to 44% of Black African, 39% of Black Caribbean,
31% of Bangladeshi, 21% of Pakistani and 9% of Indian
(Fraser, 2009)
Finance
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18. A typology of borrowers
New/ Renewed
borrowers
(New successful
applicants)
Unpropitious borrowers
(No present need for finance)
Potential borrowers
(Debt-averse: require
finance, but no formal
application to bank at all)
Defunct borrowers
(Prior user but no
present need)
Listless nonborrowers
(Never applied, no
present need)
Dissuaded
(bank advised
against applying)
Disillusioned
(Rejected in the past;
bank poorly handled
rejection)
DismissedDeparted
Borrower declines
bank’s offer
Directly Discouraged
(by direct bank actions)
Distracted
(Other
reasons –
media,
hearsay, etc)
Daunted
(intimidated
by a priori
notions of
what bank
borrowing
entails)
Self-diagnosed
(Believed from
self-evaluation
that they
would be
declined)
Undesirable
Deals
(Unsuitable
products ,
prices or
procedures)
Partial Demand
(Do not apply for all required
finances e.g. need loan and overdraft
but apply for O/D only)
Latent demand
(Non-applicants/ non-
borrowing firms)
Extant borrowers
(Existing borrowers, no
new application)
Partial borrowers
(Do not apply for all required
finances e.g. need loan and
overdraft but apply for O/D only)
Disinterested borrowers
(Require finance, but
prefer nonbank sources)
Discouraged Borrowers
(Require finance but
certain factors discourage
application)
Bank rejects credit
application
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Indirectly discouraged
(By non-bank factors)
Declined borrowers
(Unsuccessful new
application)
Patent Demand
(Applicant/ existing
borrowers)
Notional demand
(All firms)
2
3
4
5
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19. A typology of borrowers
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20. • No gender effect detected.
 Women’s businesses’ borrowing behaviour and outcomes
categorisation not different from men’s once structural factors
(enterprise age, size, sector, etc) are accounted for.
 However, differences in amount of credit secured not presently
investigated
• A small ethnicity effect remains after accounting for structure
• Compared to Whites, some Ethnic Minorities Businesses (EMBs)
still more likely to be:
 declined credit
 Demand less than what they need (partial demand)
 Disinclined from borrowing even when they have investments
needs (i.e. debt-aversion attributable to discouragement – fear of
rejection, or disinterest – preference of non-bank finance)
• However, no evidence of EMBs being more likely to not have
investments needs
SME Finance Monitor Data Analysis
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21. SME Finance Monitor Analysis
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ETHNICITY
POPULATION
(England
2009)
Enterprise
participation
rates (SME FM
sample)
White 87.9% 92.20%
Mixed 1.8% 0.97%
Indian 2.6% 2.21%
Pakistani 1.8% 0.43%
Bangladeshi 0.7% 0.16%
Other Asian 0.7% 0.42%
All Asian or Asian British 5.9% 3.22%
Black Caribbean 1.1% 0.25%
Black African 1.5% 0.30%
Other Black 0.2% 0.10%
All Black or Black British 2.8% 0.65%
Chinese 0.8% 0.23%
Any other ethnic groups 0.8% 0.07%
Ethnicity unstated 2.66%
All minority ethnics 12.1% 7.80%
All ethnic groups 100.0% 100.0%
 Caveat: Low enterprise
participation rates by
ethnic minorities means
small EMB samples
hence statistical
estimates not quite as
robust.
 Policies to encourage
higher enterprise
participation rates
would help the robust
analysis of post-entry
performance.

22. • Significant sectoral differences
• Compared to Firms in the agricultural sector:
SMEs in manufacturing and construction: more likely to not
have investment needs (unpropitious borrowers)
Wholesale/retail: more likely to be declined, partial
borrowers, debt-averse, and unpropitious borrowers than
agricultural SMEs
Hotel and restaurant, and transport and communications
SMEs more likely to be declined
Professional services (estate agencies, accountants, etc) and
social and health services more likely to not have investment
needs compared to agricultural SMEs
• Caveat: agricultural SMEs highly diversified. Many
undertake (food) processing, others have hotels (B&Bs) and
touristic businesses, and more recently green energy
production.
SME Finance Monitor Data Analysis
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23. • Significant borrower-type differences attributable to
size
• Compared to SMEs with over 250 employees:
No significant differences in the likelihood of rejection
attributable to size
Also, SMEs with 50-99 employees and 100-250
employees have no significant differences with the
larger SMEs across all categories.
However, SMEs with 10-49 workers more likely be
partial borrowers and debt-averse than the larger SMEs
Micro-enterprises (self-employed only, 1-9 employees)
more likely than the larger SMEs to be partial borrowers,
debt-averse and to be unpropitious borrowers (i.e. have
no planned investments that require financing).
SME Finance Monitor Data Analysis
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24. • Age effects
Compared to firms over 10 years old, those
between 1-10 years more likely to be declined,
partial borrowers, debt-averse, and
unpropitious borrowers.
New SMEs under 1 year old have especially
higher rates of rejection and debt-aversion.
• No large differences attributable to location (UK
GOR level)
SME Finance Monitor Data Analysis
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25. • Ambition and Management
SMEs with a formal business plan more likely to
have secured bank credit than to have had no
planned investments.
In particular, SMEs with high growth ambitions
especially expanding product range or expanding
market reach more likely to have secured credit
SMEs with a qualified professional managing
finances less likely to be rejected, borrow partially
or not borrow at all
• Networks – SMEs that are members in an industry body
or business group more likely to have investment plans
and to secure credit
SME Finance Monitor Data Analysis
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26. • Encourage females and ethnic minority enterprise participation and in
turn the pursuit of credit
• Different sectors have different borrowing needs and may need
different financial products or credit arrangements.
 SMEs in wholesale and retail, hotel and restaurants, and transport and
communications with relatively higher likelihood of bank rejection should
also consider exploring alternative sources of finance.
• The likelihood of rejection for micro enterprises is not any different from
that of larger SMEs (250+ employees)
• However, a disinclination to apply for bank finance is quite high, in part
due to “the fear of rejection” amongst microenterprises
• Absence of investment needs , and therefore no need for credit, is also
significantly higher amongst micros than larger SMEs
 Microenterprises need to be (helped to be) more active in the
development of business opportunities and in turn the pursuit of bank
finance.
Summary and implications
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27. • The risk of rejection is very high for start-ups and the incidence of
debt-aversion (due to the fear of rejection) higher still.
 Alternative sources of finance may suit new firms more until they have
built up a sufficient record that banks can consider.
• Growth ambitions and articulate growth strategies enhance the
likelihood of securing finance
• Professional handling of business finances also vital
 Through training and business counselling, microenterprises should be
encouraged to be ambitious but to also exercise strategic and
professional managerial practices in pursuing such ambitions
• SMEs should also be encouraged to join industry bodies and
business groups to be able to draw from the abundant
resourcefulness of such networks
Summary and implications
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28. ERC WP3 Next steps
• Wealth and Assets survey data
• Understanding Society/ British Household
Panel Survey
• 30 case-studies of entrepreneurship in the
household context
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29. Thank you.
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