Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 2
ABSTRACT
This study examined the factors or determinants of successful small and medium
entrepreneurs in the United Kingdom and the sources of financing for them. As such, the
following research questions will be answered:
- What are the determinants to become small and medium successful entrepreneurs in
the United Kingdom?
- What are the characteristics of independent small business owners and medium scale
entrepreneurs in the United Kingdom?, and
- What are the sources of financing for them in the United Kingdom?
The study found that sample United Kingdom small scale and medium scale entrepreneurs
revealed that the motivations for small scale entrepreneurs are more on the pull factors or
intrinsic factors or rewards while the medium scale entrepreneurs are more on the extrinsic
factors or rewards. The small scale entrepreneurs displayed a low entrepreneurial orientation
while the medium scale entrepreneurs showed high entrepreneurial orientation.
Moreover, the prior industry experience and previous business connections of small scale
entrepreneurs are limited while the medium scale entrepreneurs are more extensive. Also, the
medium scale entrepreneurs have extensive external support networks while their small scale
counterparts are limited.
Finally, the sources of funds for small and medium enterprises in the United Kingdom
are mainly from bank financing and self-finance from savings especially during the first two
years. However, after two to five years they borrowed from banks
Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 3
Chapter 1
INTRODUCTION
BACKGROUND
Small businesses are now well recognized and acknowledged as important and pivotal
contributors to economic development, job creation, both nationally and internationally. Many
countries have now understood the significance of the small business and are now giving
emphasis to it for creation of jobs, innovation and the long term development of economy.
In fact, bulk of enterprises in all economies across the world is constituted by the small firms
and companies. Such, small companies also majorly contributes to private sector output and
employment, one which appears to be increasing over time.
An entrepreneur is no doubt a pure risk taker who creates value by offering products and
services. They provide momentum for the change, innovation and progress in the economy.
Entrepreneur is the one who has the knack of introducing new ideas in the market and they are
often keen to change the traditional strategies and approach, if necessary. An entrepreneur is
someone who can imagine the financial risk in starting up a new business and has the ability to
capitalize the opportunity of benefit to an enterprise. An entrepreneur is very creative, skilful,
innovative and always keen to explore new ideas and strategies.
The traits suggested by previous empirical research which describe entrepreneurs are: (1)
high need for achievement (Decarlo & Lyons, 1979; Hornaday & Aboud, 1971; among many
others); (2) internal locus of control (Hornaday & Aboud, 1971; Miller, 1983); (3) high need for
independence and effective leadership (DeCarlo & Lyons, 1979; Hornaday & Aboud, 1971); (4)
high need for autonomy (DeCarlo & Lyons, 1979; Sexton & Bowman, 1983, 1984); (5)
Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 5
information processing capability (McGaffey & Christy, 1975); (6) preference for moderate level
of risks (McBer & Co., 1986); (7) low conformity (DeCarlo & Lyons, 1979; Sexton & Bowman,
1983, 1984); (8) aggression, support, and benevolence (DeCarlo & Lyons, 1979); (9) energy
level, risk-taking, and change (Sexton & Bowman, 1983, 1984); (10) dominance, endurance,
innovation, self-esteem, low anxiety level, and cognitive structure (Sexton & Bowman 1983);
and (11) low interpersonal effect, social adroitness, low harm avoidance, and low succorance
(Sexton and Bowman, 1984).
Thus, this research concentrates upon the reasons influencing individuals to become
entrepreneurs and the sources of financing available for them in United Kingdom.
PROBLEM STATEMENT
This study will examine the factors or determinants of successful small and medium
entrepreneurs in the United Kingdom and the available sources of financing for them. As such,
the following research questions will be answered:
- What are the determinants to become small and medium successful entrepreneurs in
the United Kingdom?
- What are the characteristics of independent small business owners and medium scale
entrepreneurs in the United Kingdom?, and
- What are the sources of financing for them in the United Kingdom?
THE OUTLINE AND CONTRIBUTIONS OF THE RESEARCH STUDY
This study is organized into five chapters. Chapter one discussed the introduction and
background of the study, it also presents the statement of the problem, research purpose, research
Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 6
objective, the outline and contributions of the research study, definition of terms, and the
methodology of the study.
Chapter two reviews the literature and Chapter three explains the methodology of the study.
Chapter four presents the analysis of the study, and finally Chapter five summarizes and
concludes the study.
The contribution of this study to theory is that there is yet no research regarding determinants
for successful small and medium and the available sources for them in the United Kingdom. As
such, this study will be a big contribution since it fills this gap.
DEFINITION OF TERMS
Extrinsic Factors. Motivation of entrepreneurs usually due to external factors such as earning an
income and be recognized as successful by other people.
Intrinsic Factors. The motivation of entrepreneurs and franchisors to go into business due to
internal determinants such as achievement, power, and competence.
Achievement Motivation. This is the motivation drive which is due to the need of people to
achieve something significant in his life.
Power Motivation. This is the need of an individual to acquire influence and control over other
people.
Competence Motivation. This is the need of an individual to be efficient and competitive in his
business and work.
Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 7
METHODOLOGY
Research Strategy
The researcher will conduct interviews with the respondents in the areas listed in the table
below:
The areas of interviews will be conducted by the researcher on motivations which will
identify the kind of motivation that predominate small and medium business entrepreneurs. Their
entrepreneurial orientation will also be assessed and also their work/life balance.
The education level and age will also be identified for the respondents so as to determine
whether these factors are significant. Their prior industry experience will also be assessed as well
as their prior access to business networks and external support networks.
Table 1
Characteristics Small scale entrepreneurs Medium scale entrepreneurs
Motivations
Entrepreneurial Orientation
Work/family balance
Education level
Age
Prior industry experience
Previous connections to business networks
External support networks
Sources of Financing
Secondary Research
The sources of available financing for small and medium scale enterprises in the United
Kingdom will also be identified and analyzed.
Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 8
Primary Research
An interview questionnaire was designed and sent to forty (40) sample entrepreneurs wherein
twenty are small scale entrepreneurs and another twenty of them are medium-scale entrepreneurs
in the United Kingdom. Time is at a premium and a questionnaire could be fitted in around other
activities. This approach was not a preferred option – it was more a pragmatic solution to getting
the information and involvement of key entrepreneurs.
The interview covered the same themes of the questionnaire. The aim being to give me the
freedom to explore areas more deeply as appropriate. People do tend to give you more
information and expand in a discussion rather than the limited responses gained from
questionnaires.
Other methods considered were:
Multi Disciplinary Focus groups
This was discounted as it would have been difficult to organise logistically.
Telephone interviews
This was discounted as it was felt that a telephone interview to start with would be a bit
impersonal, there is the potential to use them for a follow up to the questionnaire. This was not
used as the return of the questionnaires was sufficient to provide helpful information at this
stage.
Questionnaires to the whole organisation
This was discounted as there is a certain amount of question fatigue. The relevance of
consulting all staff would not be relevant as the key person to interview is the owner himself..
Data Collection
Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 9
The collection of data will be done through interviews from the respondents.
Data Analysis
The data will be analyzed by reviewing the voice recording in the interviews and through the
notes of the researcher which will be written according to the guidelines in Table 1.
These interview questions were answered and this was all saved in a recorder. The researcher
evaluated all these answers in the recorder and replayed it repeatedly in order to analyze their
insights and views. This evaluation and analysis were then written by the researcher in the
analysis and findings as well as quoted the interviews of the owners as evidences of the findings.
Interview Form
Dear Respondent,
The researcher is conducting a study on small and medium scale enterprises in the United
Kingdom as a requirement for his academic degree in the university. It would be appreciated if
you can answer the following interview questions:
- What are your motivations when you started as an entrepreneur? What are your
motivations today as an entrepreneur?
- What are your entrepreneurial orientations?
- How is your work/family balance?
- What is your education level?
- How old are you?
- What are your prior industry experiences before going into entrepreneurship?
- What were your previous connnections to business networks?
Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 10
- What are your external support networks? and
- What are the sources of financing?
Summary
Thus, this study will be conducted by utilizing literature review as a research tool and
complimented by exploratory research through survey/interview the respondents.
Chapter 2
REVIEW OF LITERATURE
Introduction
Small businesses are now well recognized and acknowledged as important and pivotal
contributors to economic development, job creation, both nationally and internationally. Many
countries have now understood the significance of the small business and are now emphasizing it
for creation of jobs, innovation and the long term development of economy.
In fact, bulk of enterprises in all economies across the world is constituted by the small firms
and companies. Such, small companies also majorly contributes to private sector output and
employment, one which appears to be increasing over time.
Entrepreneur
Entrepreneur is no doubt a pure risk taker who creates value by offering products and
services. They provide momentum for the change, innovation and progress in the economy.
Entrepreneur is the one who has the knack of introducing new ideas in the market and they are
often keen to change the traditional strategies and approach, if necessary. Entrepreneur is
someone who can imagine the financial risk in starting up a new business and has the ability to
capitalise the opportunity of benefit to an enterprise. An entrepreneur is very creative, skilful,
innovative and always keen to explore new ideas and strategies (Adler, 2002; Aldrich, 1989;
Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 11
Alstete, 2003; Anderson et al, 1992; Anna et al, (1999). For more of entrepreneurship please see
Belcourt et al. (1991); Bennett & Dann (2000); Bird (1989); Birley & Westhead (1994).
Research on Entrepreneurial Traits
The traits suggested by previous empirical research which describe entrepreneurs are: (1) high
need for achievement (Decarlo & Lyons, 1979; Hornaday & Aboud, 1971; among many others);
(2) internal locus of control (Hornaday & Aboud, 1971; Miller, 1983); (3) high need for
independence and effective leadership (DeCarlo & Lyons, 1979; Hornaday & Aboud, 1971); (4)
high need for autonomy (DeCarlo & Lyons, 1979; Sexton & Bowman, 1983, 1984); (5)
information processing capability (McGaffey & Christy, 1975); (6) preference for moderate level
of risks (McBer & Co., 1986); (7) low conformity (DeCarlo & Lyons, 1979; Sexton & Bowman,
1983, 1984); (8) aggression, support, and benevolence (DeCarlo & Lyons, 1979); (9) energy
level, risk-taking, and change (Sexton & Bowman, 1983, 1984); (10) dominance, endurance,
innovation, self-esteem, low anxiety level, and cognitive structure (Sexton & Bowman 1983);
and (11) low interpersonal effect, social adroitness, low harm avoidance, and low succorance
(Sexton and Bowman, 1984).
Yonekura (1984) proposed that the following characteristics: “ assertiveness, insistence,
forward-looking, critical thinking, creativity, innovation, continuity, preparedness, responsibility,
open-mindedness, etc. Burch (1986) mentioned nine salient traits, which dictated a high
propensity for one to behave entrepreneurially. They are: a desire to achieve, hard work,
nurturing quality, able to accept responsibilities, reward oriented, optimistic, excellence-oriented,
Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 12
an organizer, and money oriented. (http://www. airiatech. com/personal-traits/computertechnology/
yonekura. html).” As such, entrepreneurs possessed those traits mentioned in order to
be successful in business.
The reasons for people to go into entrepreneurship is an area which is widely researched in
the area of management (Walker, 2004). Majority of these studies suggests that people are
motivated by personal and financial reasons like achievement need, independence, and the
creation of wealth (Bird, 1989; Birley and Westhead, 1994; Burns, 1996; Hisrich, 1986; Kuratko
et al., 1997). Generally, most of the studies suggest that personal internal reasons are more
important motivations as compared to financial reasons in going into entrepreneurship. (Gray,
1993).
Apart from the impact of personal and financial goals on organizational choice, an individual’s
perception of his or her present job situation may influence small business adoption. Difficulties
experienced within the organization such as their thinking that it lacked opportunities and that
their pay were low and not commensurate to their performance pushed them to start their own
businesses (Moore and Buttner, 1997). Furthermore, those who have no work also forced them to
become entrepreneurs (Still and Guerin, 1991), even though the clarity of the entry of business
and its form are not that clear to them at the start (Praag, 2003; Vodopivec, 1998; Walker, 2004;
Walker and Brown, 2004; Burke et al., 2002; Burns, 1996; Buttner & Moore, 1997;
Process of Starting Up the Business
The entire work culture and scenario of the small and medium business has improved a lot in
the last few years. Success or failure of any business depends on its start up. This is the first and
most vital step which decides the future of enterprise. All other steps are secondary, but
establishment of the firm should be done carefully, so that it can grow and develop to its full
Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 13
potential (Carter et. al., 1996; Carter & Anderson, 2001; Carter & Cannon, 1988; Chaganti &
Parasuraman, 1996; Cliff, 1998).
The steps involved in the business start up can be classified as:
Business Start Up
In this section, we will consider both theoretical and practical aspects. Variation between
theories of starting up a business and practical situation faced by the owner will be highlighted
here (Coleman, 1988).
It is quite likely to have difference in the theories and practical aspects, which are as follows:
Formation of idea
Theory- An entrepreneur has the idea of business before starting up any activity. This step is
very important because each and every aspect of business is considered in it. This step is also
very important because every pros and cons of the particular business is decided at this stage
(De-Bruin & Lewis, 2004; Deakins & Whittam, 2000).
Opportunity Recognition
The entrepreneur must be able to recognize opportunities for business and this is not an
easy task. Opportunity might result from certain trends in the market such as the need for a new
product or service (Kotler, 1972; Deshpande, 1983).
Market Research and Business Plan
It is quite likely to have difference in the theories and practical aspects, which are as follows:
he should carry out the SWOT Analysis to analyse the strength, weakness, opportunity and threat
in his business (Kotler, 1990; Dyer, 1994).
Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 14
Arrangement for Finance
There are various sources of finance available for the entrepreneur and the small and medium
sized firm. However, in the simplest way, it can be classified as the internal and external source.
Internal sources of finance include the personal equity of the entrepreneur, usually in the form of
savings, remortgages or perhaps money raised from family and friends (Feldman & Bolino,
2000; Fielden et al., 2003; Fitzgerald and Muske, 2002; Leazar, 2002).
Usually, in the small and medium firms, there is highest possibility that the major fraction of
the total finance is contributed by the internal sources like family and friends (Lee & Mathews,
1999; Hisrich, 1986).
On the other hand, banks, equity from venture capitalists and informal investors and short
term trade credit are the external sources of finance. Other external sources are leasing, hirepurchase
and factoring (Anderson, 1997).
Optimum Use of Resources
To make any business successful and for its best possible growth and development, optimum
and proper use of the resources is very important. In small towns, where business activity is less
as compared to cities, the small business owner’s ability to mobilize and gather the required
resources from their environment becomes vital (Gimeno, 1997; Gray, 1993; Gatewood et al.,
1995; Gundry & Welsch, 2001) Moreover, such areas are viewed as being lean in terms of those
resources associated with the business start up. They are portrayed as being distanced from main
markets and main centres of business activity, have lower and more dispersed population, a
weaker infrastructure, local markets are limited due to lower population.
“ Despite the apparent difficulties in starting up and running a business to towns, the number of
businesses has grown”. (Anderson, 1997)
Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 15
Problems in Starting Up a Business
When starting up a business, the owner is bound to face some problems. There are basic
steps and procedures that should be followed by the entrepreneur, while starting a business. But
the problem arises when the successful implementation of these steps becomes difficult, due to
the problems in the market. Sometimes things do no happen in reality as they were expected and
also it may take longer time than expected (Martins et al., 2002; Marschack, 1994; Morrison,
2000; Olson, 1992; Praag, 2003; Rainbird, 1991).
Major problems in starting up a business can be classified as:
- Goodwill- When a business is new, it lacks good reputation in the market, which is called
Goodwill. In business, it is very important to have goodwill. It means that the business has
trustworthy image in the market. Sometimes, just because of lack of goodwill, customers don’t
trust the company (Reynolds, 2000; Robichaud et al., 2001).
- Market Prediction- It is essential for the entrepreneur to have the market predictions. The
market trends keep on fluctuating. Thus the entrepreneur has to mould himself according to the
market situations. If he does not maintain pace with the market trends it becomes very difficult to
be in the race. This is not a very easy job (Robinson, 1994; Shane, 1995; Smith, 2000).
- Financial Gap- The existence of a financial gap arises because demand from small firms is
greater than the willingness of financial institutions to supply the finance at current market
conditions. For finance such as bank loans, these gaps may be termed as credit rationing
(Stanworth & Stanworth, 1997).
- Getting the premises in prime location- Getting a good location to set up the business is a very
big issue. The entrepreneur should keep in mind to get the best location. If the location is good
and is very close to all the available resources then he can grab the opportunities of using these
Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 16
resources (Taylor, 1980).
- Judging the customer expectations- It is very hard to match the ever changing expectation and
demands of the customers. It is very difficult to have an exact idea about the choice of the
customers. In this case it becomes very difficult for the new firms to have an idea about the
customer expectations (Timmons et al., 1985).
Growth of the Firm
Greiner’s Growth Phases Model describes the Framework which helps in understanding why
certain Management styles, Organizational structures and Coordination mechanisms work in
some phases and why these don’t work at certain phases in the development of an Organization.
In 1972, Larry E. Greiner originally proposed this model with five phases of growth and more
recently he added a sixth phase to his model (Harvard Business Review, May 1998). Each phase
has a particular management style, faces specific problems, and each phase has been dominated
by particular management style to achieve growth. This model suggests the organizations to go
through the 6 stages of growth and need appropriate strategies and structures to cope up
(http://www. mindtools. com/pages/article/newLDR_87. htm).
Phase 1: Growth through Creativity
This phase comes at the start-up stage of a company. In this phase, entrepreneurs of the firm
will be busy in production and opening up markets. As there will be less staff, very hard work is
required and the informal communication will work. This phase ends with a Leadership Crisis.
New professional management people will be brought in (Walker & Brown, 2004).
Phase 2: Growth through Direction
In this phase, growth continues in an environment of more formal and functional Organization
structure, Accounting, Capital management, budgets and focus on separate Standardized
Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 17
processes like marketing and production. Incentive schemes will be introduced as a financial
reward. This phase ends with an Autonomy Crisis: New structures based on delegation are called
for (http://www. mindtools. com/pages/article/newLDR_87. htm; Walker, 2004).
Phase 3: Growth through Delegation
The Organization continues to grow with a decentralized organizational structure. The top
management just monitors and deals with the big issues, where the mid-level managers freed up
to react fast to opportunities for new products. In this phase the operational and market level
responsibility increases and formal communication will be maintained. This phase ends with a
Control Crisis: More sophisticated functioning from the head office is required and business
need to work together ( http://www. mindtools. com/pages/article/newLDR_87. htm).
Phase 4: Growth through Coordination and Monitoring
Growth continues with the formation of product groups, thorough review of formal
planning, centralization of support functions. Corporate staff will be hired for the oversees
coordination. Investment finance is allocated centrally and managed according to Return on
Investment (ROI). Incentives are shared through the lower level of company in order to motivate.
This phase ends on a Red-Tape Crisis: A new culture and structure must be introduced (Birley &
Westhead, 1994).
Phase 5: Growth through Collaboration
In this phase, new evolutionary paths are introduced. The previous formal controls are
replaced by decentralized support staff to deliver projects in a matrix structure supported by
sophisticated information systems and team-based financial rewards. This phase ends with a
crisis of Internal Growth: Partnerships with complementary organizations is required (Greiner;
Birley & Westhead, 1994; Burns, 1996).
Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 18
Phase 6: Growth through Extra-Organizational Solutions
Greiner’s recently added sixth phase to his model suggesting the organizations that growth
may continue through merger, outsourcing, networks of organizations and by involving other
companies (http://www. mindtools. com/pages/article/newLDR_87. htm); Carter et al., 1996).
A Case Study of a Successful Entrepreneur
Dr. Naveen Parihar was born in 1963 in his home town Nagod, situated in Madhya
Pradesh, a State in India. He is a dental surgeon by profession. After his schooling, Dr. Parihar
took admission in BDS (Bachelor of Dental Surgeons), in 1982. After completing BDS from
Rukhmani Devi Dental College Lucknow, Uttar Pradesh, he worked with a private dental clinic
as a junior dental specialist, to gain some experience.
Later, Dr Parihar got the opportunity to join the renowned Birla Hospital, as a dental
specialist. He grabbed this offer because of the reputation of the Hospital and also because the
hospital was in district headquarters Satna, 25 Kilometres from his hometown Nagod.
He continued working with the Birla Hospital for 7 years. An entrepreneur to the core, Dr
Parihar was not enjoying the stereotypes life and then he decided to become self employed by
establishing his own business. As he was specialised in dentistry, he decided to stick to his skills
and start a business in this field. Later on, he did thorough market research and considered all the
aspects related to this business. He found out that establishing a dental clinic in the nearby
headquarters (Satna) would not be a fruitful idea because of the cut-throat competition and
saturation in the market. Therefore, he decided to open a clinic in his hometown (Nagod) itself.
The main aim of Dr Parihar, behind opening this clinic was to provide dedicated and quality
services to the local and nearby residents of the town. He always believed that the profit can only
Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 19
be achieved by providing good services to the customers (Patients).
Curewell Dental clinic was established in 8th, August, 2001. The clinic was set up in only
three rented rooms in a building, in which one room was waiting room for patients, the second
room was the meeting room and the other room was for the check up. The check up room was
equipped with essential surgical equipments like dental chair.
The owner was bound to face some problems by starting up a clinic in a small town. The first
problem faced by the owner was the lack of skilled helping hands in the town. Dr Parihar also
realised that hiring skilful assistants from the city would not be a very good decision, as it would
increase the start up cost of the clinic.
Also, he did not want to comprise with the quality and skills. Hence, Clinic was started with
limited helping hands and in its early stage there were only three skilled assistants in the clinic.
Belief of the Owner in Entrepreneurial Theory
As written in most of the theories, he has always kept the things simple and stuck to the
basics without forcing the things to get happen. Dr Naveen Parihar has the experience of almost
20 years, in this field. He set a goal to achieve profits and he was aware of the limitations of its
clinic in its early stage.
He has always been confident enough to take risk, creating and adopting new ideas in the
business, if necessary. If we talk about his qualities then he is highly specialised in his field and
has the ability to identify market trends. On the other hand, he is hard working, intelligent,
courageous and knowledgeable.
Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 20
Problems Faced By Curewell Dental Clinic
- Costly Dental equipments- It was one of the main issues in starting up a clinic as the dental
equipments are very costly. For Dr Parihar, cost of the equipments including dental chair was
half of the total start up cost. He also wanted to install latest and efficient equipments. Thus, for
him it was tough task to manage this.
- Registration of the clinic- To start any business in health and safety sector, it has to be
registered with the government section called ‘ Health and Safety Society’. Before getting
registered with this section, one needs to fulfil certain criteria. This can take few weeks or
months and can certainly delay the whole project.
It also requires lot of documentation before applying if the registration. Dr Parihar also suffered
the same problem and got the registration after two months.
- Marketing- It was the matter of concern for the owner as he was setting up his business in a
town. Thus, there were very limited chances of advertisement in th