Sources of finance for small and medium enterprises

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 the area. Mouth advertisement
was the only marketing that could be done in that area.
Lack of skilled man power- Skilled helping hands was also a big issue for the owner. He was
aware that it would be difficult to find skilled assistants for the clinic. Thus, the clinic was started
with only 3 skilled assistants.
Winning faith of the local residents- After the business was opened, main aim of the owner was
Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 21
to make trustworthy image of the clinic in that area. He was aware that in this profession, faith of
the costumers plays a crucial part in decided the future.

Summary and Conclusion

Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 26
There are three main theories of entrepreneurship. Economic theory is the prevalent
theoretical framework that has been the general model of income choice. The essence of the
income choice is made by comparing the wages as individual expected to earn through
employment. Social theory makes it possible to better understand the interaction between the
characteristics of the situation and the characteristic of entrepreneur. Psychological theory
consists in identifying certain personality characteristics or traits that appears to be possessed by
successful entrepreneur picking winners.

Small and medium scale enterprises are now well recognized and understood as significant
and essential factors to economic development, job creation, both nationally and globally. Many
nations 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.
Majority of businesses around 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 a pure risk taker who creates value
by offering products and services. This businessment provide momentum for the change,
innovation and progress in the countries they are in. An entrepreneur is the one who has the zest
of creating new ideas in the market and they are often keen to change the traditional strategies
and approach, if necessary. An entrepreneur is a businessman who can take the financial risk in
starting up a new business and has the ability to maximize the opportunity of benefit to an
enterprise.

The traits suggested by research for successful entrepreneurs are that they have a high need
for achievement; they have internal locus of control; they have a high need for independence and
effective leadership; they have a high need for autonomy and many other traits that should
Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 27
followed by prospective entrepreneurs. In a study in Australia about entrepreneurs and
franchisors they found that in terms of entrepreneurial orientation, franchisors displayed a low
orientation while independent small business owners have high orientation. In the area of
work/family balance franchisors showed a low orientation while independent entrepreneurs
showed high orientation.

In the area of education level, the female franchisors resulted to a lower level than the
independent entrepreneurs. In terms of age, the franchisors are more than 35 years old while the
independent entrepreneurs are lower than 35 years old. In the area of prior industry experience,
the franchisors had limited exposure while independent entrepreneurs had extensive industry
experience. Also, in terms of prior access to business networks, the franchisors had limited
access while the independent entrepreneurs had extensive access.
Moreover, the independent entrepreneurs have extensive external support networks while the
franchisors have limited external support networks .

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.

A case study of Dr. Parihar who is a successful entrepreneur found that he believed in
entrepreneurial theory and that he 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
Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 28
has the ability to identify market trends. On the other hand, he is hard working, intelligent,
courageous and knowledgeable. Dr Naveen Parihar always tries to adopt latest technology, if
necessary. He was the first one to recognise new trends and introduced blood bank, X-ray, and
Sonography facilities in the town. He also established new units to his nursing home and
provided better services to the local and nearby residents.

He has always carried out proper strategic and business planning before taking any crucial
step. Dr Parihar knows how to give better performance with limited resources, which is the key
factor of his success.

The small and medium enterprises in the United Kingdom played a key role in economic
development. As such, the government supported its growth. out of the 4.81 million private
enterprises in the United Kingdom, 99.9 percent are classified as small and medium scale
enterprises (SMEs) and they are responsible for 59.4 percent of employment in the country as
well as 50.1 percent of private sector turnover. The sector also experienced growth from 2007 to
2008.

Most of these private enterprises are (see Table 1) small which is 99.3 percent of the total and
they employ about 0 to 49 employees per enterprise while the medium enterprises is 0.6 percent
which numbered at 27,000 enterprises and employs from 50 to 249 employees per firm. The
large enterprises employs more than 250 employees per firm percent which numbered at 27,000
enterprises and employs from 50 to 249 employees per firm.
Based on the research findings given above, there is still a research gap on the identifying
the entrepreneurial background/traits and sources of financing and differentiating it from small
and medium scale enterprises in the United Kingdom. These traits are the following:
motivations; entrepreneurial orientation; work/life balance; education level; age; past industry
Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 29
experience; past connection to business networks; external support networks; and sources of
financing.

Chapter 3

Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 30

FINDINGS AND DISCUSSION

Findings

The interview results of ten United Kingdom small scale and medium scale entrepreneurs
and entrepreneurs (see Table 2) revealed that the motivations for small scale entrepreneurs are
more on the pull factors or intrinsic factors or rewards and for medium scale business ownership,
their motivation are more on the extrinsic factors or rewards.
In terms of entrepreneurial orientation, small scale entrepreneurs displayed a low orientation
while medium scale business owners have high orientation. In the area of work/family balance
small scale entrepreneurs showed a low orientation while medium scale entrepreneurs showed
high orientation.

In the area of education level, the small scale entrepreneurs resulted to a lower level than the
medium scale entrepreneurs. In terms of age, the medium scale entrepreneurs are more than 35
years old while the small scale entrepreneurs are lower than 35 years old.
In the area of prior industry experience, the small scale entrepreneurs had limited exposure
while medium scale entrepreneurs had extensive industry experience. Also, in terms of previous
connections to business networks, the small scale entrepreneurs had limited access while the
medium scale entrepreneurs had extensive access.
Moreover, the medium scale entrepreneurs have extensive external support networks while
the small scale entrepreneurs have limited external support networks.

Table 2 United Kingdom Entrepreneurs Interview Results

Characteristics Small Scale Entrepreneurs Medium Scale

Entrepreneurs

Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 31

Motivations Pull Factors (intrinsic
factors/rewards)

Extrinsic Factors

Entrepreneurial Orientation Low High

Job/life balance Low High

Education level Lower Higher

Age <35 years >35 years

Past industry experience Limited Extensive

Prior access to business networks Limited Extensive

External support networks Limited Extensive

Motivations for medium scale entrepreneurs are more on intrinsic factors while small
scale entrepreneurs are more on extrinsic factors;
The entrepreneurial orientation of medium scale entrepreneurs are high while small scale
entrepreneurs are low.
The work/family balance orientation of small scale entrepreneurs showed a lower level
than the medium scale entrepreneurs;
The medium scale independent entrepreneurs have a higher level of education than its
small scale counterparts;
The small independent entrepreneurs are younger than the medium scale entrepreneurs;
The medium scale entrepremeurs had or have more extensive advantage than the small
scale entrepreneurs in terms of past industry experience, previous connections to business
networks, and external support networks.

Sources of Funds

Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 32

Discussion

As regard to entrepreneurial orientation of the small and medium scale enterprises in the
United Kingdom, the medium scale enterprises had a higher orientation and that is probably they
have evolved to become medium scale enterprises. The traits suggested by empirical research is
confirmed in this study that they have a high need for achievement. They have also internal locus
of control and also a high need for independence and effective leadership.
This study also confirms that most of them have a high need for autonomy since they want to
work on their own and be accountable for themselves. They have also information processing
capability and preference for moderate level of risks since entrepreneurs are also risk takers.
These entrepreneurs are also assertive, positive and forward looking, creative and innovative.
They are also responsible and open-minded. They are also hard-working individuals, rewardoriented
as well as money-oriented.

Based on data gathered in the review of literature, out of the 4.81 million private enterprises
in the United Kingdom, 99.9 percent are classified as small and medium scale enterprises
(SMEs) and they are responsible for 59.4 percent of employment in the country as well as 50.1
percent of private sector turnover. The sector also experienced growth from 2007 to 2008 (http://
stats.berr.gov.uk/ed/sme/smestats2008-ukspr.pdf).

Most of these private enterprises are small which is 99.3 percent of the total and they employ
about 0 to 49 employees per enterprise while the medium enterprises is 0.6 percent which
numbered at 27,000 enterprises and employs from 50 to 249 employees per firm. The large
Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 33
enterprises employs more than 250 employees per firm percent which numbered at 27,000
enterprises and employs from 50 to 249 employees per firm.
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. As Hussein et al (2006)
summarized in their study:

“Evidence suggests that there are similarities as well as differences between SME financing in
the UK and in China. In terms of initial (start-up) funding, a large proportion of respondents
relied exclusively on financial support from their immediate family. After two years in
business, respondents exhibited a higher reliance on own savings and the financial support of
bank and other financial institutions. At the end of five years of uninterrupted economic
activity, most of the owner/managers in the UK sample relied for their borrowing needs
primarily on financial institutions and to a lesser extent upon their own savings (Hussein et al,
2006,p.584/http://www.emeraldinsight.com/Insight/viewContentItem.do?
contentType=Article&hdAction=lnkpdf&contentId=1581927).”
As such, in the empirical research of this study it is also confirmed that most of the small
enterprises started from their own savings and then after two to five years they start to get
financing mostly from banks.

Based on interviews of franchisors and independent entrepreneurs in Australia (see
Appendix), most of the entrepreneurs who resigned from their work would like to be
independent as one of them said:

“I had been a customer service manager in a bank, but I’d reached my limit…I’d been passed
over for promotion too many times. It was so frustrating…I wanted to embark on a new career,
Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 34
something that would re-ward my input and my talent.”
(http://findarticles.com/p/articles/mi_qa3896/is_200601/ai_n17186081/pg_13/?tag=content;col1)
Another entrepreneur confirms his desire to be independent as he stated:
“I wanted to be my own boss and creatively craft my business, but it was more than that…I
wanted to realize my potential and get compensated for it…
(http://findarticles.com/p/articles/mi_qa3896/is_200601/ai_n17186081/pg_13/?
tag=content;col1).”

Most of the entrepreneurs also wants to make money as this is really the bottom line of
going into business. As one of them stated:
“Sure, I wanted to have some control over my work, but the bottom line was that I wanted to
make money. I was sick of working too hard and not getting true performance appraisals or
bonuses…(http://findarticles.com/p/articles/mi_qa3896/is_200601/ai_n17186081/pg_13/?
tag=content;col1).”

Some entrepreneurs could not get employment because they feel isolated and some of them
want to supplement the income of their husband and this what started her to become an
entrepreneur. As she stated:
“I couldn’t get a job…I felt isolated and had no confidence…but I needed to supplement my
husband’s in-come…starting a hairdressing service from home seemed the obvious alternative
given my training.”
(http://findarticles.com/p/articles/mi_qa3896/is_200601/ai_n17186081/pg_13/?tag=content;col1)

Some of the entrepreneurs as confirmed by this study already realize the importance of
building contacts and networks in business. As one of them said:
Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 35
“So many owners in the pool industry make the mistake of focusing on building the number of
partners rather than looking after the profitability of each territory. I knew right from the outset
that I needed to help each licensee build relationships with their local community…like local
advertising with local businesses in the area, before I concentrated on advertising for new
recruits.” (http://findarticles.com/p/articles/mi_qa3896/is_200601/ai_n17186081/pg_13/?
tag=content;col1)

Some of the entrepreneurs were not happy working for other people and they expect from
themselves. They would like to take risk and also they want to put their new ideas into action. As
one of them stated:

“Some people are happy working for someone else…I have higher expectations on myself… I
knew it would be risky, but I wanted to come up with new ideas…new financial planning
alternatives that would develop and expand my customer
reach…”(http://findarticles.com/p/articles/mi_qa3896/is_200601/ai_n17186081/pg_13/?
tag=content;col1)

Most of them also lose their jobs and they were forced to work on their own but it was a
blessing in disguise for them. As one entrepreneur said:
“Losing my job was a blessing in disguise. Being my own boss allows me to work in something I
like doing. It’s less boring than working for a company because you’re always looking to do
something new…something better. It’s a highly competitive environment we work in, if you
don’t monitor how your competitors are doing things and find out new information, you’ll lose
your position in the market.”
(http://findarticles.com/p/articles/mi_qa3896/is_200601/ai_n17186081/pg_13/?tag=content;col1)

Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 36
Most entrepreneurs are highly competitive and they wanted to expand their business and
would resort to discounts and promotions. As one entrepreneur interviewed expressed:
“…What we are having to do is expand into our major competitors’ product categories to
retain our current market share, by offering similar lines…at cheaper prices. And in the
meantime I’m having to battle with them on discounts and promotions while I also compete
with my own stores in Capalaba and Chermside…”
(http://findarticles.com/p/articles/mi_qa3896/is_200601/ai_n17186081/pg_13/?
tag=content;col1)

Most of the entrepreneurs are also innovative and creative. As an entrepreneur boosted
with this reply:
‘There’s a lot of room for innovation in manufacturing, but you need to train your staff so as
to harness that creativity. I’ve shown my staff how to follow a stage-gate process, so we can
benefit from their creative thoughts, but ensuring that we drop ideas that don’t stack-up before
we get burnt.” (http://findarticles.com/p/articles/mi_qa3896/is_200601/ai_n17186081/pg_13/?
tag=content;col1)

As a female entrepreneur, family is important for them and it is being independent and
owning their own time that can give them more time for their family even if their business is
only small. As one of the female entrepreneurs confessed:
“I remember thinking that being an entrepreneur doesn’t mean that you can ignore that you are a
wife and mother. I felt that being in small business had its advantages, having the ability to pick
my son up from school…was one…”
(http://findarticles.com/p/articles/mi_qa3896/is_200601/ai_n17186081/pg_13/?tag=content;col1)

Another entrepreneur also expressed her opinion regarding family and private enterprise:
Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 37
“…you can’t just tell your boss that you’re going to leave work to pick up the kids from school.
Being in private enterprise appealed to me…you can take some time off during the day and make
up the hours later…
“(http://findarticles.com/p/articles/mi_qa3896/is_200601/ai_n17186081/pg_13/?
tag=content;col1)

Entrepreneurs are family oriented and they are concerned with work and family balance. As
one of them said:
“Although we are divorced now, I knew that my husband wouldn’t assume the family
responsibilities. It was my job, so family balance was important to me before I jumped into
owning my own coffee shop.”
(http://findarticles.com/p/articles/mi_qa3896/is_200601/ai_n17186081/pg_13/?tag=content;col1)

Entrepreneurs are pragmatic and they believe that the best teacher is experience as one of
them said:
“…you develop your skills through experience. I didn’t know anything about managing
employees and the corporate structures you need in place to monitor and reward performance…
until I was in business. You can’t learn these things in school.” (http://findarticles.com/p/articles/
mi_qa3896/is_200601/ai_n17186081/pg_13/?tag=content;col1)

Their education had helped them to be successful in their own business and they used what
they have learned to promote productivity in their company. As one entrepreneur put it:
“I have an degree in human resource management which has come in handy when I want to
search out the relevant legislation on selection and recruitment…but I suppose its not as relevant
to all of my roles and responsibilities as chief executive officer of a construction company…but
Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 38
it has also been helpful because I know where to find the information I need on marketing,
promotions and customer relationship management.”
(http://findarticles.com/p/articles/mi_qa3896/is_200601/ai_n17186081/pg_13/?tag=content;col1)

Entrepreneurs are hard working and they have a passion for their work and also a passion
for risk. They are willing to sweat it out to get the job done. As one entrepreneur expressed:
“When I decided to expand my business into a chain of stores, I knew that it would be a taxing
time…I never thought it would be easier to manage my roles as parent…and manager of my
business. But it was a risk I wanted to take so that I could do something that I felt passionate
about.”(http://findarticles.com/p/articles/mi_qa3896/is_200601/ai_n17186081/pg_13/?
tag=content;col1)

Chapter 4 CONCLUSION

The following are the conclusions derived from the findings:

Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 39

Ten United Kingdom small scale and medium scale entrepreneurs and entrepreneurs
revealed that the motivations for small scale entrepreneurs are more on the pull factors or
intrinsic factors or rewards;
The entrepreneurial orientation for small scale entrepreneurs are that their motivation are
more on the extrinsic factors or rewards;
In terms of entrepreneurial orientation, small-scale entrepreneurs displayed a low
orientation;
Medium-scale business owners have high entrepreneurial orientation;
In the area of work/family balance small scale entrepreneurs showed a low orientation
while medium scale entrepreneurs showed high orientation;
In the area of education level, the small scale entrepreneurs have a lower level than the
medium scale entrepreneurs.
In terms of age, the medium scale entrepreneurs are more than 35 years old while the
small scale entrepreneurs are lower than 35 years old;
In the area of prior industry experience, the small scale entrepreneurs had limited
exposure while medium scale entrepreneurs had extensive industry experience;
As regard to previous connections to business networks, the small scale entrepreneurs
had limited access while the medium scale entrepreneurs had extensive access;
The medium-scale entrepreneurs have extensive external support networks while the
small scale entrepreneurs have limited external support networks.
Based on data gathered in the review of literature, out of the 4.81 million private
enterprises in the United Kingdom, 99.9 percent are classified as small and medium scale
Sources of Finance for Small and Medium Scale Entrepreneurs in the United Kingdom 40
enterprises (SMEs) and they are responsible for 59.4 percent of employment in the
country as well as 50.1 percent of private sector turnover;
The sector also experienced growth from 2007 to 2008;
Most of these private enterprises are small which is 99.3 percent of the total and they
employ about 0 to 49 employees per enterprise while the medium enterprises is 0.6
percent which numbered at 27,000 enterprises and employs from 50 to 249 employees
per firm;
The large enterprises employs more than 250 employees per firm percent which
numbered at 27,000 enterprises and employs from 50 to 249 employees per firm;
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
As such, in the empirical research of this study it is also confirmed that most of the
small enterprises started from their own savings and then after two to five years they
start to get financing mostly from banks.

REFERENCES

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