Special Issue constitutes an edited selection
from the papers of a conference Financing SMEs,
sponsored by Sweden’s NUTEK and held in
Brussels in September 1995. The conference
program was structured to include a significant
proportion of the papers by policy-makers from
both the public and the private sectors, the
remainder to be contributed by the academics.
Some 50 participants from seven European coun-
tries attended over a two day period and 14 papers
were presented. The purpose of the present volume
is to present an edited selection of the more
academically oriented papers to the readers of
Small Business Economics.
The next section outlines some of the themes
that emerged from the conference and is followed
by the papers themselves.
In this overview we adopt as a working definition
of the small business the European Commission’s
employment criterion for an SME: any business
that employs less than 250 people.
therefore include all Sole Traders, and the majority
of Partnerships and Private Limited companies.
1. Differences in the financial structure of small
vs. large businesses
It is now well-known that small businesses are not
‘scaled-down versions’ of large businesses. The
process by which a large business has achieved its
current size is of course one of evolution rather
than scaling, and this process of evolution will
involve major changes in management structure
and functioning, in particular in the methods by
which the business is financed (Penrose, 1959).
The simplest and most readily available represen-
tation of a firm’s finances is to be found in the
firm’s accounts data.
Hughes’ excellent scene-
setting paper in this Issue begins with an analysis
of a large U.K. sample of small business accounts.
He shows that, as predicted, there are indeed major
differences in account structure between small and
Hughes, who also surveys a large body of other
U.K. research, finds (inter alia) that smaller busi-
nesses have (a) lower fixed to total assets ratios;
(b) a higher proportion of trade debt in total assets;
(c) a much higher proportion of current liabilities
to total assets (and in particular a much greater
reliance on – especially short term – bank loans to
finance their assets); (d) are heavily reliant on
retained profits to fund investment flows; (e)
obtain the vast majority of additional finance from
banks (with other sources, in particular equity,
very much less important); (f) are financially more
risky, as reflected in their relatively high debt-
equity ratio and in their higher failure rates (for
the latter result see e.g. Evans (1987a, b); Storey
et al. (1987) and Cressy (1996b)).
These differences are fascinating, and call for
explanation. Some of these facts, as Hughes
argues, can be explained by the Pecking Order
hypothesis (POH) of Myers and Majluf (1984),
derived in the context of what we might now call
‘large firm analysis’. The POH asserts that under
conditions of asymmetric information, firms will
choose finance sources for their business in a
particular order that minimises interference and
ownership dilution. This implies that internal
sources (trade debt and retained profits) are
European SME Financing:
Small Business Economics 9: 87–96, 1997.
1997 Kluwer Academic Publishers. Printed in the Netherlands.
Final version accepted on November 13, 1996
Centre for Small and Medium Enterprises
Warwick Business School
University of Warwick
Coventry CV4 7AL