Sources of Finance for SMEs in UK and US - Essay Example

Thus the sizes, related industry, year of operating and organizational forms are the most important factors that determine the finance sources for a SME (Rutherford, Oswald, n.p, 1999) and most of the SMEs get finance through their internal funds like the starting capital of the owner, loan arranged by the owner of SME and the retained earning. However along with these internal sources the SME get external debts from the financial institution also and this credit help the SMEs in financing their different business operations.

The main sources of finance for the SMEs of UK are identified in the survey conducted by Federation of Small Businesses (FSB) in 2004. According to the figures provided by FSB, SMEs do use more then one source to finance their business. 50.8% of the SMEs in UK use the bank drafts to finance their business, 30. 6% used personal savings, 29.5% use bank loans, 28.5% use retained profits and 25.5% use credit cards debts to finance their business (Carter et al, p14, 2004). The report of FSB further disclosed that leasing and factoring are not commonly used by the SMEs for getting credits to finance the business.

The new SMEs mostly depend on personal saving and credit cards whereas the older SMEs depend more on supplier's credit. On the other hand, the survey conducted by SmallBusinessFinances(SSBF)of America in 1998 discloses the main sources of credit for SMEs in United States. The report discloses that there are 80 percent of US SMEs that used to take some kind of credit from different sources. 34% of the SMEs in US get credit to finance their business from business credit cards, 46% use personal credit cards, and 28% use credit line whereas 21 percent use vehicle loans.

Financial institutions are also important source of credit and there are 38% of the SMEs that use to get credit from commercial banks and 13.3% SMEs take loans from finance companies. The report shows that the smaller size firms have little access to the banks and financial institution as compared with developed and big SMEs (Watson, p35, 1993) The credit availability to SMEs for financing is surrounded by an important issue of lending technologies. There are five major lending technologies used by the financial institutions and banks to provide credit to SMEs for financing their business operation.

In UK and US the SMEs get loans from different financial institutions through different lending technologies among them the relationship lending and transaction based lending are the most important types (Thorsten and Demirguc, p2931, 2006). The commercial banks in UK and US mostly find it more profitable to provide credits to the SMEs through relationship lending as they got shelter ageists price competition by using this lending technology. (Allen, Udell, p2931, 2006) however this trend is more common among the UK banks and the banks in US like to provide credit to SMEs through transaction based lending as they get high interest rates and there is poor risk rating for this type of credit lending.

In UK when the SMEs failed to get credit from banks and other financial institu