The bank financing of small firms in UK: Issues and evidence

This paper focuses on the, often strained, contractual relationships between banks and small firms in the UK. In the UK both the adequacy of the supply of debt finance to small firms (the so-called finance gap) and the contractual conditions attaching to it have frequently been seen as a major constraint on the development of the small firm sector. In this regard, the main UK clearing banks have been identified as the main culprits and have frequently been criticised for being too risk-averse, particularly in relation to the financial needs of rapidly growing small firms.Our analysis of the theoretical and empirical literatures suggests, however, that the perception of a finance gap and other contractual conflicts between banks and small firms can be more adequately explained in terms of the differences in the economic functions, relative risks, payoffs and, therefore, the economic interests of the suppliers of equity and debt finance.