 Small
business finance
Small businesses dominate enterprise numbers in the economy and make
significant contributions to employment and income. They are not just scaled-down versions
of larger businesses and their financing has unique features. These include a primary
reliance on bank debt as a source of funding, higher failure rates with associated higher
lending margins, and the potential for internal and external constraints on funding in
both the debt and equity markets. Such funding 'gaps' are due to informational
asymmetries, scale economies in the provision of funds and the greater market power of
large businesses over small. Government small firm policies have been largely directed at
rectifying these perceived market failures, in particular to obviating funding gaps.
However, the empirical evidence suggests that market failures are less widespread than is
commonly thought.
Marc Cowling
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