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JSBED
13,4
584
Journal of Small Business and
Enterprise Development
Vol. 13 No. 4, 2006
pp. 584-599
q Emerald Group Publishing Limited
1462-6004
DOI 10.1108/14626000610705769
SME financing in the UK and in
China: a comparative perspective
Javed Hussain, Cindy Millman and Harry Matlay
UCE Business School, Birmingham, UK
Abstract
Purpose – The purpose of this research is to outline the preliminary results of an empirical
investigation into access to finance and related issues, as experienced by SME owner/managers in the
UK and in China.
Design/methodology/approach – The authors employed a telephone survey involving a sample of
SME owner/managers operating in the UK and in China. A detailed, semi-structured questionnaire
was administered to a selected sample of 32 matched SMEs. The survey requested quantitative and
qualitative information on sources of finance, both preferred and actually used by owner/managers,
during three stages in their firm’s business cycle: at start up, after two years and over the next five
years.
Findings – 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. In contrast, owner/managers in China depended mainly
upon financial support from their immediate family and to a lesser extent on financial institutions.
Research limitations/implications – The sample for this research study is both small and
selective. It is not meant to represent a random or statistically significant selection of either the UK or
Chinese SME sectors.
Originality/value – The financing preferences of owner/managers in the sample have been
influenced by their perception of the relative strength and weaknesses of domestic finance
infrastructures. The results of this research study is indicative of SME owner/managers’ financing
needs, attitudes and perception. Future developments and the strengthening of the legal and financial
infrastructure in China could significantly reduce the comparative gap between owner/manager
preferences in these two countries.
Keywords Entrepreneurs, Finance, Owner-managers, Small to medium-sized enterprises,
United Kingdom, China
Paper type Research paper
Introduction
It is now recognised that Small and Medium-sized Enterprises (SMEs) make a
significant contribution to the socio-economic and political infrastructure of developed
and developing countries as well as the nations in transition from command to market
economies (Matlay and Westhead, 2005). Furthermore, a healthy and growing SME
sector is perceived to be crucial for sustainable competitive advantage and economic
development at local, regional and national levels (Porter, 2006). In turn, Harper (1998,
p. 17) notes that “. . . the relative and absolute importance of small enterprises has
grown enormously over the last twenty years; this real growth has been matched by
appreciation of their role. What were previously regarded as temporary stepping
stones to real business are now recognised as one of the most vital contributors to SME financing
peoples incomes and to development, however they may be defined”. in the UK
According to Westhead and Wright (2000), the absence of adequate funding
represents a major obstacle to the entrepreneurial process in a firm – regardless of size, and China
location or type of economic activity. Some “life style” entrepreneurs can satisfy their
small firms’ financial needs by requesting loans from their families, friends or
acquaintances (Hussain and Matlay, 2007). Typically, however, the vast majority of 585
growth oriented SMEs rely on long-term funding made available by banks, financial
institutions or venture capitalists (see, for example, Donckels, 2000; Mason and
Harrison, 2000; Manigart and Sapienza, 2000). Importantly, when the cost of survival
or growth strategies in these firms exceed the availability of financial resources owned
and controlled by owner/managers, they becomes dependent on the availability of
external sources of finance.
In most industrially developed and developing economies, a growing number of
SMEs need access to a wide range of sources of finance. Arguably, well functioning
capital markets could facilitate access to finance, promote entrepreneurship and enable
growth oriented businesses to operate profitably and make a significant contribution
towards employment and economic stability. It is suggested that SMEs, through their
inherent advantage of size and flexibility, have the ability to engage in product, service
and knowledge innovation, respond rapidly to new opportunities, diversify their
operations and contribute significantly to net job creation (Garvan and O’Cinneide,
1994). This is acknowledged by government agencies in most countries, including the
UK and China.
In this paper, we set out to investigate SME access to finance in the UK and in
China, in order to gain an insight into the experiences and behaviours of domestic
entrepreneurs at start-up, after two years, and across a five year period of
uninterrupted economic activity. First, we explore entrepreneurial and organisational
characteristics in the context of the specialised finance literature. We analyse the
financing behaviour of SME owner/managers in the UK and in China through in depth
investigation of their finance mix and intended as well as actual outcomes. Second, we
seek to deconstruct longitudinally the relationship between entrepreneurs and their
providers of finance, over a five years period. The quantitative and qualitative data
that emerged from this research study was used to compare and contrast the complex
reality of financing smaller enterprises in two countries that differ significantly in their
position as industrially developed and developing economies.

SME financing in the UK

It is now widely accepted that SMEs make a significant contribution to wealth creation
and net employment growth in industrially developed countries (see Birch, 1979; Birch
et al., 1993). Furthermore, smaller firms are perceived to be key players in innovation,
industrial restructuring, wealth generation and economic growth (Storey, 1994).
According to Poutziouris (2003), SMEs also contribute significantly to the
internationalisation process in mature economies. The important role attributed to
smaller businesses has propelled the SME sector to the forefront of the UK government
agenda, resulting in a variety of relevant initiatives and support policies (Matlay, 2004).
There exists a consensus amongst stakeholders and business observers that SMEs
play an important role in economic development for a knowledge-based economy
JSBED (Deakins et al., 2000), and the lack of government intervention to address the issues of
13,4 market failure could have serious implications for the economic development and
competitiveness of a country. In the long term, the adverse impact of not supporting
viable small businesses (type 1 error) outweighs the risks of cumulative business
failure (type 2 error) within a mature economy (Deakins and Hussain, 1994; Fraser,
2004).
586 The reliance on savings and informal means of financing smaller firms is of
considerable importance to UK entrepreneurs. According to Chami (2001), similar
trends in small business finance can also be found in developing economies, including
China. In recent years, policy makers in the UK have attempted to address the apparent
market failure to supply adequate and specific finance for SMEs. In the main, their
efforts were driven by continuous and radical restructuring of the domestic economy
over a relatively long period of liberalization of trade practices, accelerated
internationalisation and the emergence of leaner and global businesses. The
additional threat posed by the recent emergence of global e-Businesses, which have
considerable competitive advantages over firms operating in tradition traditional
industries, provided a further impetus for increased support of domestic SMEs. In this
context, there are considerable similarities in policy imperatives between the UK and
China.
Industrial restructuring and growing unemployment, poverty and social exclusion
and the erosion of national competitiveness in international markets strengthened the
case for sustained government intervention in the SME sector of the UK economy. The
vast array of support policies and initiatives aimed at SMEs appears to have succeeded
in mitigating some of the negative impacts of capital market failure, especially in the
case of small business start-ups. In addition, support for more and better
entrepreneurial activity in the UK has gained a central position in the government’s
strategy to alleviate poverty and minimize social exclusion. Recent research, however,
tends to support the view that SMEs in the UK have encountered problems in
accessing finance to support fixed capital investment and to provide working capital
(Tucker and Lean, 2001). According to Deakins and Hussain (1994) banks tend to
provide short-term finance that limits SMEs’ capacity to undertake long-term strategic
planning. Consequently, most SMEs appear to operate with higher levels of debt than
their larger counterparts and also exhibit an increased reliance on short-term debt
(Holmes and Kent, 1991). There are two explanations for these tendencies: first, this is
symptomatic in capital markets due to its imperfections, which could prevent smaller
businesses from accessing the most appropriate form of finance, such as equity and
debt. Second, UK bank lending policies have increased institutional control upon
managerial lending decisions and, in turn, this resulted in greater centralization
tendencies (Mason and Harrison, 1996). An increasingly centralized banking system
had the effect of standardising lending decisions while removing some of the discretion
that bank mangers could exercise when considering personal and/or local conditions in
relation to the approval of small business loans. Arguably, in the process, commercial
banks lost their lending flexibility and might routinely reject viable propositions in the
detriment of local and regional SMEs.
The specialist literature in general and for ethnic minority SMEs in particular,
claims that informal sources of finance can overcome the finance gap that exists in the
UK. Nevertheless, bank financing is set to remain an important factor for start-up
businesses in this country (Mason and Harrison, 1993). Importantly, the extent of, and SME financing
reliance on, informal networks of finance tend to be underdeveloped for smaller firms in the UK
operating in the SME sector of the UK economy Hussain and Matlay, 2007). In addition,
imperfections in domestic financial markets limit the scope of a small business to raise and China
finance from alternative sources, and most SMEs remain reliant upon traditional “high
street” bank lending (Walker, 1989).
Current research seems to validate the view that SME owners/managers’ financing 587
decisions are consistent with the “pecking order” theory (Holmes and Kent, 1991;
Scherr et al., 1990; Mayers, 1984). Furthermore, Cosh and Hughes(1994) suggest that
under these circumstances an owner/manager will choose first – a personal source of
finance; second – short-term borrowing; third – longer-term debt; and – finally, the
least preferred, equity finance which might affect his/her control upon the business.
The pecking order theory also suggests that owner/managers tend not to sufficiently
organise their finances in order to obtain an optimal capital structure (i.e. debt versus
equity ratio) but prefer financing options that both ensure and maintain their control
upon a business. Thus, it appears that for SMEs in the UK, bank financing remains the
primary choice of finance (Petersen and Schulman, 1987).
There is a growing body of literature that questions the capital market failure for
SMEs (Fraser, 2004). According to Wilson (2004), 71 per cent of respondents in his
research sample did not perceive that accessing finance was a barrier to SME survival
or growth. These findings are consistent with current research (see, for example,
Natwest/SBRT, 2003; Hussain and Martin, 2005) which show that fewer than 1 per cent
of respondents reported that access to finance was or could become a strategic issue.
Cosh and Hughes (2003) and SBS (2001/2002) also noted that finance is not a major
barrier to SME development in the UK. Such studies, however, need to be treated with
caution, as their samples only consider those SMEs that managed to secure finance and
therefore, by definition, the finance gap might not have presented a barrier for these
owner/managers. It would be interesting to replicate such research with a sample of
SMEs that failed as a result of financial constraints or mismanagement.
It should be noted that the banking sector in the UK has reacted to earlier criticism
and introduced computer aided credit scoring which may have allowed for greater
objectivity and lessened the importance of the bank managers’ views and experiences.
According to Graham (2004), the current credit scoring system does not take security
into account for authorising finance and that this method is only used for loans of up to
£30,000. There is no conclusive evidence, however, to suggest that the perceived
finance gap for new start-ups is no longer impacting upon smaller firms, in particular
during prevailing recessionary conditions. Neither is there empirically rigorous
research to substantiate the view that banks do not require collateral for viable
borrowing propositions. It is suggested, therefore, that government intervention
remains essential, especially for new start-up businesses in the UK.

SME financing in China

China is currently one of the world’s fastest growing economies, with GDP growth
figures of around 9 per cent per annum (IOSC, 2004). The Chinese economy has been
undergoing institutional transformation since the initial economic reforms commenced
in 1978. Chen (2006) identifies three major economic development stages alongside the
country’s reforms and opening-up policies. The first important phase (1978-1992) was
JSBED characterised by the rapid expansion of the Chinese SME sector. The second stage
13,4 lasted from 1992 until 2002 and involved, in parallel, a reform of state-owned SMEs
and the continued development of the public sector. The ongoing third stage involves
designated government policies and support measures aimed at consolidating and
further developing the expanding Chinese SME sector. Since 1992, the Chinese
government focused mainly on enhancing the overall quality and competitiveness of
588 the domestic SME sector (Chen, 2006, p. 141).
Interestingly, the emergence of township and village enterprises, in the second half
of the 1980s represented the main focus of Chinese economic dynamism and the further
development of its private sector provided the main source of sustainable economic
growth (Yeung, 2004). Ongoing reforms and opening-up policies have created and
maintained a fertile environment for the development and growth of SMEs, especially
in the private sector (Li, 2004). Thus, smaller firms, in both the private and the public
sectors of China, have played an important role in the expansion of the national
economy as well as the promotion of social development, employment, technological
innovation, training of entrepreneurs and the maintenance of overall economic vitality
(Krug, 2004).
Importantly, gradual reforms, commencing in the mid-1980s, also encouraged
commensurable growth of the banking and financial sectors of this country. The
development and growth of China’s private sector not only complemented but linked
directly and indirectly into the regulatory reforms and re-structuring of the banking
and financial systems. In 1984, the People’s Bank of China became the central bank and
a series of reforms introduced new institutions and support measures, as well as
incentives and mechanisms for both the financial sector and its entrepreneurial
customers. Apart from the original state-owned banks, rural credit cooperatives,
commercial banks, trust and investment companies, insurance companies, security
companies and urban credit cooperatives have been introduced in late1980s (Li, 2004;
Tam, 2003;). In the meantime, by gradually reforming the planned economy system,
the government relaxed its barriers on the development of SMEs so that different
entrepreneurial and organisational forms (e.g. urban collective enterprises, township
and village enterprises, individual businesses, private enterprises, foreign funded
enterprises and joint ventures) could develop and coexist (Chen, 2006).
Beginning with 1999, the Chinese Ministry of Finance in collaboration with other
government departments started to actively promote a SMEs loan guarantee system.
By 2001, a number of laws and regulations had been introduced, including the
Provisional Regulation of SME Credit Guarantee System and the Management
Methods of Credit Guarantees for SMEs. By the end of 2000, 30 provinces,
municipalities and autonomous regions in China opened pilot sites for the SME
credit-guarantee system, established more than 200 credit-guarantee institutions,
raised a guarantee fund of 10 billion Yuan, and contributed to the expansion and
improvement of the credit environment for SME development. The Ministry of Science
and Technology provided 10 billion Yuan per annum to build venture capital funds for
high-tech enterprises. Throughout the reform process in recent years, China has begun
placing an emphasis on the issue of supporting SME development. Nevertheless, China
lacks a long-term, systematic, unified and relatively independent SME development
strategy and policy system. Similarly, its social service system needs updating and
improving and the burden of taxation is considered high by European standards. It is
often argued that without sufficient financial support and relevant facilities to obtain SME financing
short-term loans or raising funds, the current SME development boom might slow in the UK
down or even come to an end (Wang, 2004).
Recent research has highlighted that there are considerable gaps in the support and China
provision of SMEs, especially those that operate in the Chinese private sector. For
instance, Hanchun, (2002) conducted two surveys in 1998. In the first survey, he
established that most of the capital employed (more than 50 of the total assets) of the 589
vast majority of the sampled SMEs came from self-accumulation. Among the minority
of enterprises that relied on bank loans, most used state-owned commercial banks,
while a few approached rural credit cooperatives. The second survey revealed that 67
per cent of the surveyed SMEs raised their fixed assets investment by themselves; 81
per cent had more than 50 per cent self-raised fixed assets investment; and only 3 per
cent cent had their initial fixed-asset investment borrowed from financial institutions.
Similarly, the survey by the project group on the research on Chinese private
enterprises, organized by China Industrial and Commercial Union (CICU) and Research
Commission of Chinese Private Business (RCCPB) conducted five nationwide sampling
surveys on private enterprises in 1993, 1995, 1997, 2000 and 2002. The results show
that when private enterprises were started, 65.5 per cent of capital originated from
self-accumulation; 21 per cent from bank loans and rural credit cooperatives; and 13.5
per cent were borrowed from friends, relatives and individuals (Li, 1998, p. 75). The
final (2002) survey in this series established that the average capital of private
enterprises amounted to 2.50 million Yuan, but self-accumulated money still
represented the major source (about 55 per cent) for small business start-ups. Thus, it
appears that when Chinese entrepreneurs start a business, most of the necessary “seed
bed” funding originates from private savings or borrowings and not from bank loans.
With the exception of a few top performing businesses, the vast majority of SMEs in
China do not possess sufficient self-accumulated capital to meet their full capital
requirements. As such, it appears that there exists a finance gap for SMEs in China,
which might limit or constrain their future growth. In addition, due to certain systemic
limitations, it is sometimes difficult for SMEs to obtain venture capital directly from
the internal capital market, as used extensively by entrepreneurs in most industrially
developed economies. Thus, we suggest that the finance gap in China has significant
implications for growth oriented SMEs and in order to support their sustainable
competitive in international markets, future financing and support policies in this
country have to be at least commensurable with those in developed economies, such as
the UK.

Methodology and research sample

In setting out to collect empirically rigorous and comparable data in relation to SME
financing in the UK and in China, the authors designed a detailed, semi-structured
questionnaire which was translated, piloted and administered in the two native
languages. The questionnaire required respondents in 32 matched SMEs to provide
quantitative and qualitative information on their sources of finance, both preferred and
actually used by these owner/managers, during three stages of their firm’s business
cycle: at the start up, after 2 years and over the next 5 years. The participating SMEs
were selected from official domestic databases (widely available in both countries) and
matched, as near as possible, to represent a relevant and comparable research sample.
JSBED The original questionnaire was piloted on a small sub-sample of firms and adjusted to
13,4 reflect the feedback received from these respondents. The main telephone survey was
carried out by two of the authors during November and December 2005 in the UK and
over the December 2005 to February 2006 period, in China. In order to closely match
socio-economic aspects and characteristics of respondents and their SMEs, the two
comparative samples were deliberately limited to two geographical areas: the West
590 Midlands region of the UK and the Eastern region of China.

Preliminary results and discussion

The preliminary results that emerged from this research study have highlighted a
number of similarities and differences between the two samples. The main findings are
briefly described below.

Owner/manager characteristics
Age. An analysis of the age of owner/managers in the research sample showed that in
the UK, the most frequent respondent category was positioned, respectively, in the
30-39 (35.6 per cent) and above 50 (35.5 per cent) range. Similarly, the highest
proportion of owner/managers in China was also positioned in the 30-39 (50.5 per cent)
age range, followed by the under 30 years old respondents (44.5 per cent). In contrast to
the UK 40-49 years range (14.7 per cent), in China only 5.0 per cent of owner/managers
were found to belong to this category. Interestingly, none of the owner/managers in
China fitted into the above 50 age range (see Table I).
Gender. The vast majority of respondents in the research sample were male: 78.6 per
cent in the UK and 88.9 per cent in China. Only 21.4 per cent of respondents in the UK
and 11.14 per cent in China were female owner/managers.
Highest qualifications. In total, more then half (53.8 per cent) of respondents from the
UK indicated that vocational qualifications represented the highest level of education
achieved. In contrast, none of the Chinese respondents belonged to this category.
Secondary school qualifications were cited by 7.7 per cent of UK respondents and 11.0
per cent of owner/managers in the Chinese sample. Interestingly, undergraduate
degrees were held by 30.8 per cent of owner/managers based in the UK and by the
highest proportion (89.0 per cent) of owner/managers located in China. Furthermore,
7.7 per cent of UK respondents claimed to hold a postgraduate degree. None of the
Chinese respondents fitted into postgraduate degree category.
The authors posit that prevailing socio-economic condition in both countries have
impacted considerably upon the entrepreneurial careers of owner/managers in both the
UK and in China. More research into the impact of age, gender and educational
qualifications is needed in order to establish causal links, direction and the influence of
socio-economic factors on entrepreneurship as well as SME start-ups, survival and
success.

Business characteristics
Sector of economic activity. The sector of economic activity in which respondents
operated was similar in both countries. In the UK, 35.7 per cent of owner/managers
operated in the Retail and in Services (both personal and financial) sectors,
respectively. The balance of 28.6 per cent of respondents was positioned in the
Manufacturing sector of the UK economy. Similarly, in China, 32.0 per cent of
 SME financing
UK China
Variables (%) (%) in the UK
Age
and China
Under age 30 14.2 44.5
Between 30-39 35.6 50.5
Between 40-49 14.7 5.0 591
Above 50 35.5
Total 100.0 100.0
Gender
Male 78.6 88.9
Female 21.4 11.1
Total 100.0 100.0
Sectors
Retail 35.7 32.0
Manufacturing 28.6 30.0
Services (personal and financial) 35.7 38.0
Total 100.0 100.0
No. of employees
1-9 (micro) 42.9 44.5
10-49 (small) 46.1 44.4
50-249 (medium) 11.0 11.1
250 þ (large)
Total 100.0 100.0
Annual turnover
Less than £100k 14.3 39.4
Between £100k-£200K 35.7 33.3
Between £200k-£500k 42.9 22.2
Over £500K þ 7.1 5.1
Total 100.0 100.0
Duration of the business
5 years 35.7 33.4
Between 5 – 10 years 42.9 55.6
10 years þ 21.4 11.0
Total 100.0 100.0
Highest qualifications
Vocational qualifications 53.8
Secondary school 7.7 11.0
Undergraduate degree 30.8 89.0
Postgraduate degree 7.7 Table I.
Total 100.0 100.0 Business characteristics

owner/managers were active in Retail and 38.0 per cent in the Service sector. A
marginally smaller proportion of respondents (30.0 per cent) were operating in the
Manufacturing sector of the Chinese economy (see Table I).
Number of employees. All the owner/managers interviewed belonged to the SME
sector of the UK and Chinese economies. In total, 42.9 per cent of owner/managers in
the UK and 44.5 per cent of respondents in China operated micro-businesses that
employed between 1-9 individuals. Similarly, 46.1 per cent of UK respondents and 44.4
per cent of Chinese owner/managers belonged to small businesses with 10-49
JSBED employees. Medium-sized enterprises (defined as those employing 50-249 individuals)
13,4 were represented by 11.0 per cent of respondents in the UK and 11.1 per cent in China.
Annual turnover. Annual turnover levels within the sample varied considerably
between businesses in the two countries. For instance, 14.3 per cent of SMEs in the UK
and 39.4 per cent in China operated at an annual turnover level of less than £100,000
(comparative exchange rate on 30th April 2006). Similarly, 35.7 per cent of UK and 33.3
592 per cent of Chinese firms exhibited turnover levels in the £100,000-£200,000 range. The
highest proportion of UK owner/managers (42.9 per cent) claimed to have achieved an
annual turnover of between £200,000 and £500,000 – as compared to 22.2 per cent of
Chinese respondents. Only 7.1 per cent of UK respondents and 5.1 per cent of
owner/managers in China reached annual turnover levels in excess of £500,000.
Duration of the business. The longevity of businesses in the sample was also
measured in terms of continuous, economically active years in existence since
inception. In total, 35.7 per cent of businesses in the UK sample and 33.4 per cent in
China have been economically active for less than 5 years. The highest proportion of
respondents continued in business for 5 to 10 years: 42.9 per cent in the UK and 55.6 per
cent in China. The lowest respondent proportion represented in these samples belonged
to those SMEs that have been economically active in excess of 10 years: 21.4 in the UK
and 5.1 per cent in China.
The authors would suggest that caution needs be exercised in the interpretation of
this data, as the research sample was small and selective, and not a random
representation of either the UK or Chinese SME sectors. Further research on a larger
and more representative sample would be useful in contextualising the financing
preferences of SME owner/managers in these two countries.

Financing preferences of SME owner/managers

The financing preferences of UK and Chinese SME owner/managers in the sample was
analysed at three distinct points in their firms business cycle:
(1) at start-up (initial funding);
(2) after 2 years (continuation finance mix); and
(3) 5 years (consolidation finance mix) since inception.

Clear indications emerged in relation to these owner/managers’ types and sources of

financing preference (see Table II).
Initial funding. A relatively small proportion of respondents in the UK (14.3 per cent)
and in China (22.2 per cent) relied, at the start-up stage, exclusively on their own
savings. More than half of the sampled owner/managers in the UK (57.7 per cent) and
over two thirds in China (70.1 per cent) claimed to have raised their initial funding from
members of their immediate family. In the UK, 28.0 per cent of respondents approached
financial institutions, but only 7.7 per cent in China resorted to borrowing from banks.
Finance mix after 2 years. After 2 years in operation, most of the SMEs in the
sample have undergone sufficient development to alter their ‘continuation finance mix’
as well as the relevant financing preferences of the owner/managers in the research
sample. For instance, in the UK sample, owner/manager reliance on his/her savings
increased to 28.3 per cent. Interestingly, however, in the Chinese sample there was no
change (22.2 per cent) on this aspect of financing. Reliance on borrowing from an
owner/manager’s immediate family has decreased significantly both in the UK (15.7
 SME financing
UK China
Variables (%) (%) in the UK
Initial funding
and China
Owner’s savings 14.3 22.2
Owner’s immediate family 57.7 70.1
Financial institutions 28.0 7.7 593
Total 100.0 100.0
Finance mix after two years
Owner’s savings 28.3 22.2
Owner’s immediate family 15.7 53.3
Financial institutions 56.0 24.5
Total 100.0 100.0
Finance mix after five years
Owner’s savings 14.3 12.5
Owner’s immediate family 7.1 67.0 Table II.
Financial institutions 78.6 20.5 Financing preferences of
Total 100.0 100.0 the respondents

per cent) and in China 53.3 per cent. Interestingly, in both countries, borrowing from
financial institutions has increased significantly: in the UK up to 56.0 per cent and in
China to 24.5 per cent.
Finance mix after 5 years. At the end of 5 years since inception, the financing
preferences of the owner/managers in the sample have stabilised in well established
patterns of ‘consolidation finance mix’. In the UK, the respondents’ reliance on their
own savings remained at the same rate (14.3 per cent) as at inception. In contrast,
owner/manager reliance on their immediate family went down to 7.1 per cent. The
largest increase was noted on respondent reliance upon Financial Institutions (78.6 per
cent). Interestingly, in the Chinese sample, only 12.5 per cent of respondents relied on
their own savings but over two thirds (67.0 per cent) of these owner/managers
depended exclusively upon the financial reserves of their immediate family. In
contrast, only 20.5 per cent had approached financial institutions and banks in relation
to their borrowing needs.
At prima facie it appears that the financing preferences of owner/managers in both
countries changed according to the development needs of their SMEs. At the start-up
stage, most owner/managers appear to have relied considerably upon their own
savings as well as the financial support of their immediate family. After two years of
economic viability, the SMEs in the sample seem to have increased their reliance upon
the support of financial institutions. After 5 years of economic activity, most of the
owner/managers in the UK sample came to rely primarily on financial institutions for
their borrowing needs and to a lesser extent upon their own savings. In contrast,
owner/managers in the Chinese sample depended primarily on financial support from
their immediate family and to a lesser extent on financial institutions. It is suggested,
however, that differences in owner/manager financing preferences might considerably
be influenced by their perception of the relative strength and weaknesses of the
domestic finance infrastructure. It is likely that further development in, and the
strengthening of, the legal and financial infrastructure of the Chinese economy might
JSBED reduce the apparent comparative gap between owner/manager preferences in these two
13,4 countries.

Trends in ownership ratio and finance awareness

In terms of ownership ratio, 21.4 per cent of respondents in the UK and 44.2 per cent of
SME owner/managers in China claimed that it was too high. Interestingly, a further
594 71.5 per cent of owner/managers in the UK and 33.5 per cent in China felt that the
ownership ratio of their firms was about right for their industry and sector of economic
activity. Only 7.1 per cent of the UK respondents expressed the opinion that their
ownership ratio was too low. In the Chinese sample, a much higher proportion (22.3 per
cent) of respondents held the same views. In total, only 7.1 per cent of the UK
respondents and 25.0 per cent of Chinese owner/managers have attempted to
restructure their capital mix, but could not access cheaper sources of finance. Similarly,
14.3 per cent of owner/managers located in the UK and 12.5 per cent in China had
approached their existing bank for cheaper finance. A large proportion of respondents
(78.6 per cent in the UK and 62.5 per cent in China) have made no attempts to
restructure their capital mix in favour of cheaper sources of finance (see Table III).
In relation to their financial skills, 57.1 per cent of the UK respondents claimed to be
experienced and possess good knowledge in this field. In contrast, only 22.2 per cent of
SME owner/managers in the Chinese sample claimed to have good financial knowledge
and skills. In this context, the sources of financial advice were rather limited, but varied
considerably across the comparative sample. Only 1.0 per cent of respondents in the
UK admitted to use their bank manager as a source of financial advice. Importantly,

UK China
Variables (%) (%)

Level of ownership ratio

Too high 21.4 44.2
About right 71.5 33.5
Too low 7.1 22.3
Total 100.0 100.0
Financial skills and relevant knowledge
Yes 57.1 22.2
No 42.9 77.8
Total 100.0 100.0
Attempt to restructure capital from cheaper finance
Could not access alternative finance 7.1 25.0
Have approached existing bank 14.3 12.5
Neither 78.6 62.5
Total 100.0 100.0
Sources of financial advice
Bank manager 1.0
Accountant 98.5 78.0
Legal advisor
Table III. Family 10.0
Trends in ownership Government support agencies 0.5
ratio and finance None of the above 12.0
awareness Total 100.0 100.0
none of the owner/managers in the Chinese sample sought financial advice or business SME financing
support from their banks. In the UK sample, 98.5 per cent of these owner/managers in the UK
claimed to ask their accountant for financial advice. A similarly large proportion of
Chinese respondents (78.0 per cent) also approached their accountants for their and China
financial advice needs. Only 0.5 per cent of UK respondents used government support
agencies as a source of financial advice. Interestingly, however, 10.0 per cent of
owner/managers in the Chinese sample approached their families for financial advice 595
and a further 12.0 per cent of these respondents used other external sources which they
respected and trusted.

Quality of SME and bank relationship

The respondents in this research study were also asked to rate their relationship with
their bank, if they use one. Both sets of answers were revealing and provided a good
indication of owner/manager perceptions in relation to their financial institutions. All
respondent in the UK sample claimed to use a bank for their day-to-day activities as
well as their borrowing needs. In total, 71.4 per cent of these respondents described the
relationship with their banks as excellent, and a further 14.3 per cent as good.
Interestingly, the same proportion (14.3 per cent) of owner/managers admitted to poor
relationships with their banks. In the Chinese sample, 55.3 per cent of respondents
confirmed that they chose not to become involved with a bank or other financial
institution. Only 11.1 per cent of owner/managers claimed to have good relations with
their banks. About one third of the respondents in the sample (33.6 per cent) described
their relationship with their bank as poor. More, in depth research is needed in order to
identify the reasons why there were such variations in owner/manager perception
between UK based and Chinese respondents (see Table IV).

Concluding remarks
An analysis of the preliminary results that emerged from this research study has
highlighted a number of 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 the financial support of their immediate family. A
smaller proportion of respondents made use of their own savings. In total, 28.0 per cent
of respondents in the UK borrowed from banks while only 7.7 per cent of
owner/managers in China approached financial institutions. After two years in
business, respondents exhibited a higher reliance on own savings and the financial
support of banks and other financial institutions. Conversely, fewer owner/managers
relied on finance available from their immediate family. At the end of 5 years of
economic activity, most of the owner/managers in the UK sample depended for their

UK China
Variables Categories (%) (%)

Quality of relationship with financial institutions Excellent 71.4

Good 14.3 11.1
Poor 14.3 33.6 Table IV.
Do not use bank 55.3 Quality of business and
Total 100.0 100.0 bank relationship
JSBED borrowing needs primarily on financial institutions and to a lesser extent upon their
13,4 own savings. In contrast, owner/managers in the Chinese sample depended mainly
upon financial support from their immediate family and to a lesser extent on financial
institutions. It is likely that the financing preferences of these owner/managers would
have been influenced by their perception of the relative strength and weaknesses of
domestic finance infrastructures. Future developments and the strengthening of the
596 legal and financial structure of the Chinese economy could significantly reduce the
relative gap between owner/manager preferences in these two countries.
In terms of ownership ratio, respondents in both countries expressed a wide range
of opinions. In total, only 7.1 per cent of UK respondents and 25.0 per cent of Chinese
owner/managers have attempted to restructure their capital mix, but could not access
cheaper sources of finance. A large proportion of respondents (78.6 per cent in the UK
and 62.5 per cent in China) have made no attempts to restructure their capital mix in
favour of cheaper sources of finance or approached their banks to negotiate more
favourable borrowing terms. Interestingly, 57.1 per cent of UK respondents claimed to
be experienced and to possess good financial skills as compared to only 22.2 per cent of
SME owner/managers in the Chinese sample. In the UK, 98.5 per cent of
owner/managers relied on their accountants for financial advice. In comparison, 78.0
per cent of Chinese respondents also approached their accountants for advice in
relation to their financial needs. All respondent in the UK sample used their banks for
their day-to-day activities as well as their borrowing needs. Interestingly, 71.4 per cent
of these respondents described their relationship with their banks as excellent, and a
further 14.3 per cent as good. In the Chinese sample, 55.3 per cent of respondents
confirmed that they decided not to become involved with banks or any other financial
institutions. Only 11.1 per cent of these owner/managers claimed to have good
relations with their banks. Conversely, about one third of the respondents in the sample
(33.6 per cent) described their relationship with their bank as poor.
The authors would suggest caution in the interpretation of these results, as the
research sample is relatively small and highly selective. As such, it was not meant to
represent a random or statistically significant selection of either the UK or Chinese
SME sectors. Further research on a much larger and more representative sample would
be useful to conceptualise and contextualise the financing preferences and attitudes of
SME owner/managers in these two countries.

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Corresponding author
Harry Matlay can be contacted at: harry.matlay@uce.ac.uk

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