chapter  5
18 Pages

Banks and small businesses

An Anglo-Scottish comparison
ByChristine T. Ennew, Martin R. Binks

The potential contribution of the small business sector to the economy has been well documented. Thus, for example, small businesses can contribute to economic growth and development through the generation of jobs (Storey and Johnson 1987), by promoting competition (Bolton 1971) and by facilitating economic restructuring (Binks and Coyne 1989). For these positive contributions to be realised, it is important that firms are not constrained by imperfections in either output markets (Mayes and Moir 1989) or input markets (Binks and Vale 1990). One potential imperfection concerns access to capital markets and the potential for finance gaps to constrain growing businesses. The existence of finance gaps is not attributed directly to size; rather, it reflects problems of asymmetric information. Such information problems are not unique to the small firms sector but are considerably more prevalent because of the anticipated higher costs of information collection. While information asymmetries cannot be eliminated, they can be reduced and the nature of the relationship between bank and business is significant in this context. A close working relationship between the two parties can enhance the flow of information and ensure that more efficient decisions are made by both parties with respect to financing.