Finance for Small and Medium-Sized Enterprises: Comparisons of Ethnic Minority and White Owned Businesses

A Report on the 2005 UK Survey of SME Finances Ethnic Minority Booster Survey

Dr Stuart Fraser Centre for Small and Medium-Sized Enterprises Warwick Business School University of Warwick

Acknowledgements
Thanks to Mike Young (Small Business Investment Taskforce), Helene Keller (Small Business Service) and other members of the Small Business Service whose comments on an earlier draft have significantly improved this report. However, I remain entirely responsible for all remaining omissions and errors.

Contents
Acknowledgements

Glossary

Executive summary 1. Introduction

1.1 Context 1.2 Statistical analysis 1.3 Structure of the report

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14 19 20

2. Background
2.1 General issues regarding SME finance 2.2 Ethnic Minority Businesses 2.3 Ethnic Minority Business finances 2.4 Key business and owner characteristics 2.5 Summary of other business characteristics Summary

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22 24 27 31 57 65

3. Business problems
3.1 Main reason for starting in business 3.2 Main problem at start-up 3.3 Extent of current business problems 3.4 Coping with business problems at start-up 3.5 Coping with current business problems

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70 74 79 80 85

Summary

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4. Finance
4.1 Use of external finance 4.2 Types of financial products used 4.3 Use of friends and family finance 4.4 Use of business and personal credit cards 4.5 Use of Small Firms Loan Guarantee 4.6 The demand and supply of new finance 4.6.1 Incidences of demand for new finance and the types of finance sought 4.6.2 Amount of new finance sought, amount supplied and finance gaps 4.7 Financial rejections and discouragement 4.8 Self-reported consequences of financial rejection Summary

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92 94 99 101 107 108 109

118 137 142 143

5. Financial relationships
5.1 Market shares of the main finance providers 5.2 Number of finance providers 5.3 Length of relationship with main finance provider 5.4 Satisfaction with main provider of finance, bank charges and methods of communication 5.5 Switching 5.6 Financial delinquency and loan margins Summary

145
146 150 154 156

165 166 170

6. Econometric analysis of finance outcomes

6.1 Rejection 6.2 Financial discouragement 6.3 Finance gaps 6.4 Loan margins

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178 181 184 191

Summary

197

7. Conclusions

201

References

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Appendix A (Tables)
Tables relating to Chapter Two Tables relating to Chapter Three Tables relating to Chapter Four Tables relating to Chapter Five

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i xv xxx xliv

Appendix B (Technical report by Fiona McAndrew, IFF Research Ltd.)

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Glossary
EMB: Ethnic Minority Business
An EMB is defined as a business in which the owner or the majority of partners or shareholders in the business are from a particular (non-White) ethnic minority group. There are five ethnic minority groups which are considered in this report. These ethnic minority groups are: Indian; Pakistani; Bangladesh; Black Caribbean; and Black African.

WB: White Business

A WB is defined as a business in which the owner or the majority of partners or shareholders in the business belong to a White ethnic group.

SME: Small and Medium Sized Enterprises

Following the definition used by the Department of Trade and Industry (DTI) an SME is defined as a business which has less than 250 employees.

UKSMEF: United Kingdom Survey of Small and Medium Sized Enterprise Finances
This was the first comprehensive survey of SME finances and financial relationships in the UK which was conducted in the late summer of 2004. The EMB Finance Survey is a follow up booster survey to UKSMEF which uses the same methodology and survey instrument as the original survey. The UKSMEF report, data and survey instrument are available for download from the UK Data Archive (University of Essex): www.esds.ac.uk (SN 5326).

Statistical significance
The report frequently refers to differences in means/proportions between ethnic groups which are statistically significant. This means that the hypothesis that the population means/proportions for the groups are identical has been tested and statistically rejected (implying that one group has a higher/lower population mean/proportion than the other group). These tests are conducted by comparing 95% confidence intervals (see below) for the estimated means/proportions across ethnic groups. A test based on: i)

comparing the confidence intervals for different ethnic groups; and ii) inferring significance in instances where confidence intervals do not overlap, provides a conservative test of differences in means/proportions (full details from the author on request). Unless stated otherwise, the word significant is used synonymously with the phrase statistically significant.

95% Confidence interval

These intervals provide a range for estimates of population means/proportions which contains the true population mean/proportion with 95% probability. A confidence interval which crosses zero leads to an inference that the corresponding population mean/proportion is zero. Narrower confidence intervals are associated with more

accurate estimates. The width of the interval reflects the size of the sub-sample involved in the estimate (the larger the sample the narrower the interval) and the amount of variation, pertaining to the variable, in the population (more variation implying a wider interval).

Executive Summary
Ethnic Minority Businesses (EMBs) are making an increasingly important contribution to the UK economy. EMBs, like any other business, require sources of finance to fund the enterprise at start-up and, later, to fuel expansion. Previous research has suggested that EMBs experience greater problems in raising external finance than White businesses (WBs). This appears to be especially the case for Black owned businesses. However it is not immediately clear whether these problems are due to ethnic discrimination by finance providers or due to differences in lending risk between EMBs and WBs.

Objectives of the study

EMBs are a highly heterogeneous group so that aggregate comparisons between EMBs and WBs are apt to be highly misleading. In view of this, the objectives of this report are to use data from: i) the EMB Finance Survey (2005); and ii) the UK Survey of SME Finances (UKSMEF, 2004) (pertaining to EMBs and WBs respectively) to conduct:

Disaggregated analysis of finance outcomes for six ethnic groups: o o o o o o Indian Pakistani Bangladeshi Black Caribbean Black African White

Analysis of variations in risk factors (e.g., sectoral concentrations, track records and collateral) and financial relationships across the six ethnic groups. Econometric analysis of the extent to which differences in finance outcomes amongst EMBs can be explained by differences in risk factors and financial relationships.

Econometric analysis of the extent to which there is a residual element of ethnic based differences (unexplained ethnicity variations) in finance outcomes after controlling for risk factors and financial relationships.

On this last point, unexplained ethnicity variations may be due to ethnic discrimination by finance providers. However, it is important to point out that these variations could have alternative explanations which are based on non-ethnic factors.

The phrase significantly different is used in the report to describe differences in survey estimates between ethnic groups which are statistically significant: that is, the difference is unlikely to be due to chance.

General findings
Bangladeshi and Black owned businesses have the fewest financial assets and tend to be located in the most economically and socially deprived areas. Bangladeshi and Black owned businesses report experiencing the greatest problems with finance (in terms of both access and cost) of all ethnic groups and have the lowest self-confidence in dealing with finances. However Black African owner managers are the most qualified in terms of academic and financial qualifications and are the most likely to engage in business planning at start-up. Regarding the supply of banking services the supply to EMBs is more concentrated in the Big Four banks compared with the supply to WBs suggesting a relative lack of competition in the supply to EMBs. Also EMBs, in particular Black owned businesses, are less satisfied with the level of service from their finance provider and pay higher banking charges than WBs. Black owned businesses have higher rates of financial delinquency (missed debt repayments and unauthorized overdraft borrowing) than other ethnic groups.

Key conclusions

The reports key conclusions relate to the following finance outcomes:

Financial rejections (denial of finance by finance providers) Feelings of discouragement from applying for finance Finance gaps (excess of amounts demanded over those supplied) The cost of borrowing (term loan and overdraft margins over Bank of England base rate)

Regarding financial rejection and discouragement (Chapter Four):

Black African owned businesses have a 37.4% likelihood of outright rejection. This is significantly higher compared to Indian (5.8%), Pakistani (13.2%) and White owned businesses (10.4%).

Black Caribbean owned businesses have a 28.1% likelihood of outright rejection. Again this is significantly higher compared to Indian, Pakistani and White owned businesses.

Partial rejection rates vary between 18% (Bangladeshi businesses) and 30.2% (Black African businesses). However there are no significant differences in partial rejection rates across ethnic groups. Black African businesses are the most likely to feel discouraged from applying for finance 45.9% of businesses in this group which needed new finance felt discouraged.

The corresponding figure for Black Caribbean businesses is 40.6%. Both groups of Black owned businesses are significantly more likely to feel discouraged from applying for finance than Indian (11.6%), Pakistani (22.9%) and White owned (7.1%) businesses.

However, after removing differences in risk levels and financial relationships between EMBs, the report finds that (see Chapter Six):

Amongst EMBs ethnicity plays no residual role in explaining differences in rejection rates. Amongst EMBs ethnicity plays no residual role for ethnicity in explaining discouragement having controlled for risk and financial relationships.

Results for finance gaps (i.e., the difference between the amount of finance demanded and the amount supplied) show that (see Chapter Four):

There are significant finance gaps (i.e., significantly greater than zero), in absolute terms, amongst all ethnic groups apart from Indian owned businesses. The highest finance gaps are amongst Black African (14,102) and Pakistani owned businesses (13,518). WBs have lower finance gaps (5,435) if not the lowest (Bangladeshi: 3,970). However, none of these differences in finance gaps are statistically significant. On the other hand, looking at finance gaps relative to asset bases, Black owned businesses experienced significantly higher finance gaps (0.4-0.6: 40-60% of asset base) than Indian owned businesses (<0.0).

After removing the effects of differences in risk levels and financial relationships amongst EMBs the report finds that (see Chapter Six):

Pakistani owned businesses have an average finance gap which is 4,280 bigger than the finance gap for an otherwise similar Indian owned business (significant at the 5% level).

Black African businesses experience an average finance gap which is 7,824 larger than that of an otherwise similar Indian owned business (significant at the 10% level).

Relative to asset bases:

Finance gaps are 9 percentage points larger for Pakistani owned businesses relative to Indian owned businesses with the same level of assets (significant at the 5% level).

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This gap is almost 15 percentage points amongst Black African owned businesses (significant at the 10% level).

Relative to the amount of finance sought:

Finance gaps are 11 percentage points larger for Pakistani owned businesses relative to Indian owned businesses which sought the same amount of finance (significant at the 5% level).

This gap is almost 17 percentage points amongst Black African owned businesses (significant at the 5% level).

Regarding term loan margins (see Chapter Five):

WBs paid the lowest margins on average (2.3 points over base). Black African businesses paid the highest margins on average (3.7 points over base). These differences are not, however, statistically significant.

Results for overdraft margins indicate that (see Chapter Five):

WBs paid the lowest margins on overdrafts (2.0 points over base). Pakistani owned businesses paid the highest overdraft margins (3.5 points over base) which figure is significantly higher than amongst WBs.

After removing the effects of differences in risk levels and financial relationships amongst EMBs the report finds that (see Chapter Six):

Bangladeshi owned businesses paid 1.5 percentage points more on their term loans than Indian owned businesses (significant at the 5% level). There is no role for ethnicity in explaining overdraft margins having controlled for standard risk factors and financial relationships.

In general these results suggest that risk factors and financial relationships are able to explain differences in finance outcomes across EMBs. Whilst there is some evidence of

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unexplained variations in the financial outcomes of Black African, Pakistani and Bangladeshi businesses, which could be due to ethnic discrimination, it is also possible that these variations are caused by non-ethnic factors. For example about a third of Black African and Pakistani businesses are high-growth/high-risk firms for which equity finance may be more suitable than debt finance.

Next steps

Whilst non-ethnic risk factors are able to explain most of the wide variations in financial outcomes amongst EMBs, these variations remain a cause for concern in their own right since, in some cases, they are very large (financial rejections and discouragement particularly) and could lead to the perception of ethnic discrimination. In this regard better communications between finance providers and EMBs may help to remove these perceptions and draw attention to the actual criteria by which loans are priced and allocated. However, in conjunction with better communications, improved financial

support and advice, particularly for Bangladeshi and Black owned businesses, may be required to tackle head-on the underlying causes of poorer financial outcomes.

Methodology

The survey was conducted among 860 small and medium sized ethnic minority businesses (defined as firms with up to 250 employees) in the private sector in the UK. An ethnic minority business was defined as one where the owner or the majority of partners or shareholders in the business were from an ethnic minority. Public sector and not for profit organisations were excluded.

The survey fieldwork was conducted by telephone by IFF Research, an independent market research company, at IFFs CATI centre between 5 September and 18 November 2005. In addition to the 860 completed interviews, a further 50 ethnic

minority businesses identified in the data for the earlier UKSMEF (2004) survey were added to this new dataset in order to bolster base sizes. This brought the total to 910 enterprises. The breakdown of sample sizes by ethnic group is as follows:

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Indian: 202 Pakistani: 202 Bangladeshi: 103 Black Caribbean: 203 Black African 200

The data on WBs was collected in UKSMEF (2004) using a similar methodology (see Fraser, 2005). This sample consists of 2,373 businesses.

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1. Introduction
1.1 Context
About 6% of the SME population are ethnic minority businesses (EMBs); this amounts to around 218,000 businesses (Fraser, 2005). EMBs employ almost a million people

(about 7% of the total employment by SMEs) and generated revenues of over 58 billion for the UK economy in 2004 (source: UKSMEF). In this regard, EMBs constitute an important part of the SME sector and the UK economy as a whole. The economic importance of EMBs looks set to increase in the future since the ethnic minority population in the UK is growing faster than the White population. 1

EMBs, like any other business, require sources of finance to fund the enterprise at startup and, later, to fuel expansion. Unless the business owner is very wealthy or the business is mature enough to have generated its own capital, at least some of this finance will have to be accessed from external sources. On this issue, Fraser (2005) indicated that most SMEs are currently enjoying favourable access to external finance. However, the report also hinted at poorer access amongst EMBs as a whole relative to otherwise similar white-owned businesses (WBs). However due to the small sample of EMBs more definitive conclusions were not possible. Previous research has also

suggested that EMBs experience greater problems in raising external finance than WBs (Jones et al, 1994) and that Black owned businesses experience the greatest problems with external finance (Curran and Blackburn, 1993). The question of whether these different financial outcomes are due to ethnic discrimination or whether they reflect differences in lending risk across ethnic groups was not addressed in these reports.

A review of the evidence on ethnic minority finances, reported in Bank of England (1999), found no evidence of actual discrimination against EMBs by finance providers. However, the report recognised a perception amongst EMBs of unfair treatment by
The ethnic minority population in Great Britain grew by 53% between 1991 and 2001 (Source: Census, April 2001, Office for National Statistics). In contrast average population growth over the decade 1994-2004 was only 3.3%.
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finance providers. perceptions:

The report gave the following possible explanations for these

Lender risk aversion the implication here is that EMBs are riskier than WBs and so receive loans on terms (higher interest rates/shorter maturity) which reflect these risk differentials.

Sectoral concentrations because EMBs are concentrated in sectors with high failure rates (retail, catering and transport) they are less attractive to (risk-averse) lenders regardless of the business owners ethnicity.

Business planning and experience in this regard it would be expected that higher rates of business planning would improve access to finance. However the report notes that whereas black owned businesses are more likely to write business plans than either Asian or White-owned businesses they are less successful in obtaining bank finance. The report also suggested that Asian

entrepreneurs have high levels of experience which should improve their access to finance. Availability of collateral the report highlights collateral shortages (home ownership) amongst Caribbean and Bangladeshi entrepreneurs as a possible explanation for poorer access to finance amongst these ethnic groups. Information issues/financial relationships the report identifies poor information flows between lenders and EMBs as an issue. Mutually poor financial

relationships are likely to make EMBs appear riskier to lenders (objectively worsening access to finance) and worsen perceptions amongst EMBs that they are being discriminated against. Discrimination finally, the report left open the possibility that, even after taking into account the above issues, some of the EMB finance issues are due to a residual element of discrimination amongst finance providers. This

discrimination could either be direct based on irrational prejudices even to the detriment of the finance providers profits or statistical, in which case lenders use ethnicity as a proxy for unobservable risk factors. In the latter case a good EMB may find it harder to get a loan, than an otherwise similar White-owned business, simply because their ethnicity is associated with higher risk types on average.

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The paucity of hard data at the time, however, limited the conclusions that the Bank of England report was able to reach. In fact the report highlighted the desirability of

improved information and further research in the field of EMB finances.

More recently Smallbone et al (2003) presented evidence from a large scale survey of access to finance and business support amongst EMBs. Their findings indicated that African-Caribbean businesses were at a particular disadvantage in accessing bank loans relative to Asian and White-owned businesses. They regarded this finding as a matter for concern not least because the African-Caribbean businesses in their sample had above average levels of human capital (management qualifications and training).

An important finding in Smallbone et al (2003) was to show that there is greater variation in finance outcomes between ethnic minority groups than between EMBs in aggregate and WBs. Indeed, in contrast to African Caribbean businesses, there was convergence regarding (favourable) access to bank loans at start-up between Asian and White-owned businesses. This led the authors to conclude:

For policy makers, this raises the question of whether or not it is useful and/or appropriate to treat EMBs as a category from a finance and business support standpoint. One of the implications for public policy makers is to recognize that access to finance issues are greater in some ethnic minority communities than in others (Smallbone et al, 2003, p. 308/9)

EMBs form a relatively small proportion of the SME population so that finding them for a survey is problematic. Combined with the general unwillingness of businesses to

divulge financial information the implication is that obtaining large samples of EMBs for the purposes of a finance survey is no small task. Also ensuring the samples of EMBs are representative of the different EMB populations is hampered by the lack of a generally accepted sampling frame (i.e., a source of information about the populations of EMBs). In these regards this EMB finance survey differs from previous surveys on this issue (with the possible exception of Smallbone et al, 2003) in that it is both:

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Large scale (there are 910 EMBs in the sample) Representative: in the analysis, the data are weighted to the population using an authoritative source of population figures compiled by the Small Business Service (see Appendix B).

The objectives of this report are to use these data to conduct:

Disaggregated analysis of finance outcomes for six ethnic groups: o o o o o o Indian Pakistani Bangladeshi Black Caribbean Black African White

Analysis of variations in risk factors (e.g., sectoral concentrations, track records and collateral) and financial relationships across the six ethnic groups. Analysis of the extent to which differences in finance outcomes across EMBs can be explained by differences in risk factors and financial relationships. Analysis of the extent to which there is a residual element of ethnic discrimination after controlling for risk factors and financial relationships.

In some cases, for example the analysis of EMB start-ups, the samples are very small (less than 50 businesses) so that caution is required in interpreting the analysis due to a potential lack of statistical significance. However, given the novelty of many of the

results best estimates are reported even when the sub-samples involved are very small. In these cases health warnings are attached to the analysis and, in any case, the reader is informed (as with most of the results) as to whether or not the results are statistically significant.

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Some of the key findings which emerge from the analysis of the two sets of survey data are as follows:

Bangladeshi and Black owned businesses have the fewest financial assets and tend to be located in the most economically and socially deprived areas. Bangladeshi and Black owned businesses report experiencing the greatest problems with finance (in terms of both access and cost) of all ethnic groups and have the lowest self-confidence in dealing with finances.

However Black African owner managers are the most qualified in terms of academic and financial qualifications and are the most likely to engage in business planning at start-up.

Black owned businesses have larger finance gaps (the difference between the demand for new finance and supply) relative to asset bases than other ethnic groups (40-60 pence per 1 of business assets).

Regarding the supply of banking services the supply to EMBs is more concentrated in the Big Four banks compared with the supply to WBs suggesting a relative lack of competition in the supply to EMBs.

Also EMBs, in particular Black owned businesses, are less satisfied with the level of service from their finance provider and pay higher banking charges than WBs which is possibly due to the lower level of competition for EMB bank accounts.

Black owned businesses have higher rates of financial delinquency (missed debt repayments and unauthorized overdraft borrowing) than other ethnic groups). However, after removing the effects of differences in risk factors and financial relationships, analysis of finance outcomes amongst EMBs reveals that: o o Ethnicity is not a determinant of financial rejections or discouragement. However, Black African owned businesses have an average finance gap which is 7,824 bigger than the corresponding gap for an Indian owned business of the same level of risk. o Also, Pakistani owned businesses have an average finance gap which is 4,280 bigger than the corresponding gap for an Indian owned business of the same level of risk. o Bangladeshi owned businesses pay a risk premium of 1.5 percentage points on term loans relative to the margins paid by Indian owned businesses of the same level of risk.

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In general these results suggest that risk factors and financial relationships are able to explain differences in finance outcomes across EMBs. Whilst there is some evidence of unexplained variations in the financial outcomes of Black African, Pakistani and Bangladeshi businesses, which could be due to ethnic discrimination, it is also possible that these variations are caused by non-ethnic factors. For example about a third of Black African and Pakistani businesses are high-growth/high-risk firms for which equity finance may be more suitable than debt finance.

1.2 Statistical analysis

The analysis in this interim report is conducted using two separate data-sets:

The original UKSMEF carried out in 2004 which is used for the analysis of WBs. The EMB Finance Survey carried out in 2005 which is used for the analysis of EMBs.

The analysis in this report is weighted so that the results are representative of the respective populations of ethnic groups. The weights used for the main survey are population weights calculated using universe data on the absolute number of businesses in each cell (size within sector and by region: see Fraser, 2005, Appendix 1). However, the weights for the EMB Finance Survey were calculated on the basis of population percentages of businesses in the (sub-) population.
2

Whereas this difference in the weights, between the two data-sets, has no impact on the ability to compare means and proportions of EMB and white-owned businesses respectively, it does preclude analysis of population totals for EMBs (e.g., total lending, total deposits etc.). Also, the absence of an integrated data-set, with an appropriate

In effect this changes the scale of the weights between the two surveys: for the main survey the weights sum to the number of businesses in the corresponding universe; whereas in the EMB survey the weights sum to the sample size. Also, due to the paucity of EMB universe data, the EMB weights are only able to adjust for sampling rates by firm size (in contrast the main survey adjusted for firm size within sector and by region).

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weighting measure, precludes regression analysis involving samples of both EMBs and WBs (see Chapter Six).
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1.3 Structure of the report

The remainder of the report is structured as follows.

Chapter Two sets out some

background issues regarding variations in entrepreneurial activity and access to finance across ethnic groups. This chapter also looks at ethnic variations in sectoral concentrations, human and financial capital, track records, deprivation and other risk factors with a view to giving some preliminary explanations for differences in access to finance across ethnic groups. Chapter Three looks at the motivations for starting in business and business owners assessments of the extent of problems encountered at start-up, and currently, in running the business. This chapter also looks at the use of business planning, financial management and external advice in the context of strategies for overcoming business problems.

Chapter Four presents hard evidence on the finances of EMBs and WBs. In particular this chapter reports: the use of different types of financial products; the demand and supply of new finance; financial rejections; and incidences where the business owner felt discouraged from applying for new finance because they believed they would be rejected. This analysis allows the extent of finance gaps (difference between demand and supply) as well as the incidence of financial constraints (financial rejection and discouragement) to be quantified.

Chapter Five looks at issues related to the supply of financial services and financial relationships. This analysis includes variations in the levels of competition in the supply of financial services, the lengths of financial relationships, levels of customer satisfaction with the service provided and banking charges. In addition this chapter presents

3 Regression analysis (and other statistical testing requiring observations on individual firms rather than just means or proportions of groups), involving both EMBs and white-owned businesses, would require the two data-sets to be integrated into a single data-set. To achieve this integration successfully, the combined data-set would require the construction of an appropriate set of weights that took into account both: i) the over-sampling of EMBs relative to whiteowned businesses; and, ii) over/under-sampling by other business characteristics.

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evidence on differences in financial delinquency (missed debt re-payments and/or unauthorized borrowing on an overdraft) and loan margins.

The analysis culminates in Chapter Six with an econometric analysis of finance outcomes (rejection, discouragement, finance gaps and loan margins) amongst EMBs. This analysis examines whether there is a residual role of ethnicity in explaining finance outcomes having controlled for risk factors and financial relationships. Chapter Seven presents conclusions and recommendations for further study.

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2. Background
2.1 General issues regarding SME finances

Financial markets rely on the flow of information between finance providers and borrowers to work efficiently. Finance providers require information on the

creditworthiness of borrowers so they can decide whether to supply funding and, if they do, on what terms. An absence of this information will stem the supply of finance. This would clearly be to the detriment of borrowers but may also be harmful to society as a whole for example, where a business with job-creation potential is unable to finance its growth plans. Equally, borrowers require information on finance providers so they can find the best deal and switch providers if necessary. Without this information borrowers may become vulnerable to higher charges and poorer service from their current finance provider.

In the context of SMEs, policy makers have had long standing concerns that some smaller firms with viable business propositions are unable to access any or sufficient or appropriate finance. The absence of a track record, amongst start-ups in particular, may make it impossible for the entrepreneur to convince the finance provider that the business is worth investing in. Finance providers may also require loans to be secured on tangible assets, belonging to the business or its owner, so that funds can be recouped in the event that the business goes into bankruptcy. Again, smaller and

younger firms are at a relative disadvantage due to a paucity of available assets to use as security. These issues form the basis for public intervention in the form of the Small Firms Loan Guarantee (SFLG). This intervention has been refocused to assist young firms with high growth prospects but which lack sufficient tangible assets to secure a commercial loan (Graham, 2004).

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More recently, public concerns have been expressed about the lack of competition in the supply of financial services to SMEs (Competition Commission, 2002). This has led to the introduction of measures to make it easier for businesses to:

Compare the prices of banking services. Purchase these services from different suppliers. Switch between finance providers.

In relation to the twin issues of access to finance and competition in the supply of finance UKSMEF 2004 made the following key findings:

Access to Finance

For most SMEs issues with finance are near the bottom of the pecking order of business problems (coping with red-tape is at the top of the list of problems) 44% of SMEs (1.6 million businesses) sought new finance in the last 3 years. The average amount of new finance sought was just under 82,000. Amongst businesses needing new finance, 11% experienced outright rejection (180,000 businesses). However EMBs are over 2 percentage points more likely to experience rejection than WBs.

Supply of banking services

The Big Four banks account for almost 80% of the market for SME banking services. SME relationships with their main providers are long (15 years on average) and monogamous (60% have only one provider for all their finances). The average monthly bank charge is about 50. Almost 1 in 3 SMEs report some dissatisfaction with these bank charges.

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However, each year, only 1 in 40 SMEs switch banks. The majority of these SMEs switch because they are dissatisfied with service rather than bank charges.

The original survey was unable to report detailed findings for the supply of banking services to EMBs due to the small number of these businesses in the sample. Also the results on access to finance could not be disaggregated by ethnic group due to the small sample. In this context, the EMB booster survey provides an opportunity to make the requisite disaggregated comparisons of EMB finances against those of WBs.

2.2 Ethnic Minority Businesses

There is wide variation in entrepreneurial propensities over ethnic groups. The following graph of self-employment 4 rates by ethnic group shows that in 2004:

21% of Pakistanis in employment were self-employed. About 12% of Indian, Bangladeshi and White British people in employment were self-employed. Black African and Black Caribbean groups have the lowest rates of selfemployment (around 6%).

4 Self-employment is an imperfect measure of entrepreneurship in that it tends to capture more marginal forms of this activity. Business ownership may be a truer measure of entrepreneurial activity but these data tend to be less well recorded in particular amongst ethnic groups.

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Figure 2.2.1 Self-employment as a percentage of all in employment by ethnic group in 2004

Source: Annual Population Survey, January 2004 to December 2004, Office for National Statistics

These differences in self-employment will reflect variations in a complex array of interacting factors across ethnic groups. These factors include:

Access to resources: Groups which have greater access to human and financial capital will have a greater capacity to set up in business. This access will depend on the education, skills and financial wealth of the group. In this regard Bangladeshi and Black Caribbean communities have been reported to have fewer financial assets than other ethnic groups (Bank of England, 1999). This shortfall in assets may reduce the capacity of individuals in these communities to take up business opportunities. In addition

discrimination by suppliers of resources, including finance, against EMBs would potentially curtail the entrepreneurial capacities of individuals from minority communities.

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Social networks: The capacity to mobilize human and financial capital through social networks is also likely to influence variations in business ownership. Ethnic groups with strong social networks will have an advantage in this regard. For example, strong family ties amongst Asian communities may give Asian businesses access to labour and financial capital which may not be so readily available to businesses in other ethnic groups.

Access to markets: A business opportunity consists of both an idea and a market (i.e., customers). To the extent that ethnic groups have specialised tastes that need

satisfying, there are potential markets which can only be accessed by entrepreneurs who understand these tastes intimately. These entrepreneurs are most likely to come from the same community as their customers.

Whilst ethnic markets place a potential constraint on growth, the business may be able to expand into non-ethnic markets. An example of this is Indian food retailing which started out serving the specific needs of the Indian community but with changing consumer tastes now serves all ethnic groups. 5

On the other hand, a business from one ethnic community may find its access to markets limited where consumers from other ethnic groups discriminate against the business on the grounds of ethnicity. 6 This will limit the business opportunities available to individuals in the community which experiences discrimination. As a result business take-up and performance (survival and growth) may be low in that community.

Deprivation: An absence of opportunities in the labour market, due to low education or training, may push individuals into running marginal businesses out of economic
A stellar case study of this is the Indian entrepreneur Geeta Samtani. Samtani founded Geeta Foods Ltd in 1990 in response to the popularity of her homemade mango chutney amongst friends and family. Her range of Indian food products is now sold nationally through supermarkets outlets and there are plans to expand the business into export markets. 6 This discrimination could be direct in which case the consumer chooses not to purchase the product from the business because of irrational ethnic prejudices against the business owner. The consumer may pay for this prejudice by buying the product at a premium from a business owner who belongs to the same ethnic community as the consumer (the consumers prejudice effectively gives this latter business owner monopoly power over consumers from their ethnic group). On the other hand the discrimination could be statistical. In that case the quality of the product produced by the ethnic business is on average of inferior quality. Accordingly the consumer may choose not to buy the product from any individuals from the ethnic community rather than risk buying an inferior quality product.
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necessity. 7 This may raise the quantity of self-employed individuals within a community. However, these businesses are borne out of necessity rather than opportunity and are likely to be deficient in skills and financial capital. Business performance, in terms of survival and growth, is therefore likely to be low. Due to these poor prospects

businesses in deprived communities may find it hard to raise external finance. Consequently they may become trapped at the margins of economic viability - unable to raise performance for want of capital but unable to raise capital for want of better performance. This is a classic instance where public intervention may be required to help free the business from a deprivation trap so that its potential can be realized.

Deprivation remains a particular issue for Bangladeshi and Black Caribbean groups. Other ethnic groups, in particular the Indian community, appear to have been more successful in scaling the economic and social ladder (see section 2.4 below). The

extent to which deprivation is a barrier to finance which is independent of ethnicity will be examined in this report.

Attitudes to entrepreneurship: The enterprise culture within an ethnic group is also likely to influence ethnic variations in levels of entrepreneurship. For example, some Middle Eastern communities have a strong historical and cultural tradition of trading which may predispose individuals from these communities to running a business. Cultural variations in attitudes to risk (in particular, the stigma attached to bankruptcy) and talents for spotting business opportunities may also contribute to ethnic differences in entrepreneurships.

2.3 Ethnic Minority Business finances

Previous research has indicated that EMBs face above average problems regarding access to finance. Jones et al (1994) conducted a study of 403 small businesses in 15 localities of which 178 were Asian owned, 54 were African-Caribbean and 171 were White. This study found that 60% of the Asian businesses had sought a bank loan versus around 40% of the African-Caribbean and White owned businesses. Around
7

Econometric analyses of the determinants of self-employment have frequently found that unemployment is a significant push factor which increases the likelihood of self-employment.

27

40% of the African-Caribbean loan applicants reported encountering problems in obtaining the loan (either rejection or loan conditions which the applicant felt were unreasonable). About a third of the Asian applicants reported similar problems. Only 20% of the White applicants reported problems with obtaining loans. African-Caribbean businesses were also more likely than Asian or White owned businesses to rely on nonmarket sources of finance at start-up (50% versus 30-40%).

Curran and Blackburn (1993) interviewed 76 EMBs from the Greek-Cypriot, Bangladeshi and African-Caribbean communities. They also found that African-Caribbean start-ups were more likely than other ethnic groups to rely on non-market sources of finance: almost 70% relied on personal savings whereas the figure amongst Greek-Cypriots and Bangladeshi start-ups was between 50% and 60%. These authors also found that 1 in 2 of the African-Caribbean businesses said they found it very difficult to raise finance for expansion. Only 1 in 10 of the Greek-Cypriot and Bangladeshi businesses reported similar levels of difficulty.

Smallbone et al (2003) conducted a large scale telephone survey of EMBs (856 businesses from the African-Caribbean, Indian, Pakistani, Bangladeshi and Chinese communities) supplemented with a sample of 1,350 WBs. The survey found that

African-Caribbean business owners were the most likely to have formal management training or qualifications. However African-Caribbean businesses had the lowest rate of access to bank finance at start-up (21% versus 49% of Chinese owned start-ups). African-Caribbean businesses also had the least success in obtaining external finance in the 12 months prior to interview (62% versus 88% of Bangladeshi owned businesses).

Most recently Fraser (2005) based on a sample of 2,500 SMEs which included 102 EMBs, found that EMBs are 2 percentage points more likely than WBs to experience financial rejection controlling for financial relationships, business and sector risk. However this study was unable to report results disaggregated by ethnic group as it was designed to look at SME finances in general and not EMBs in particular.

A review of the evidence on ethnic minority finances, reported in Bank of England (1999), found no evidence of actual discrimination against EMBs by finance providers. However, the report recognised a perception amongst EMBs of unfair treatment by

28

finance providers. perceptions:

The report gave the following possible explanations for these

Risk aversion: Finance providers make lending decisions on the basis of an assessment of the risk that the borrower will be unable to repay the loan. Increased risk of non-payment is associated with a higher cost of borrowing, shorter loan maturities, the offering of smaller loans than requested or, if the risk is too high, the outright denial of credit. To the extent that EMBs are riskier than WBs then this will be reflected in loan amounts and conditions which appear more favourable to WBs but which reflect risk differentials not ethnicity.

Sectoral distributions: An important factor which may explain risk differentials between ethnic groups relates to the sectors in which groups are concentrated. To the extent that EMBs are concentrated in sectors with high failure rates (retail, catering and transport) they are less attractive to (risk-averse) lenders regardless of the business owners ethnicity.

Business planning and experience: In this regard it would be expected that higher rates of business planning would improve access to finance. However the Bank of England report notes that whereas black owned businesses are more likely to write business plans than either Asian or white-owned businesses they are less successful in obtaining bank finance. The report also suggested that Asian entrepreneurs have high levels of experience which should improve their access to finance.

Location in deprived areas and availability of collateral: The Bank of England report highlights collateral shortages (home ownership) amongst Caribbean and Bangladeshi entrepreneurs as a possible explanation for poorer access to finance amongst these ethnic groups. Also EMBs are more likely to be located in deprived inner city areas. This may lead to a shortage of key resources including skills and financial capital as discussed in section 2.2.

Information issues: The Bank of England report identifies the problem of poor information flows between lenders and EMBs. This is a problem which is exacerbated by a lack of data on EMBs. Cultural and language barriers are further obstacles to the

29

free flow of information. Two-way information deficiencies are likely to make EMBs appear riskier to lenders (objectively worsening access to finance) and worsen perceptions amongst EMBs that they are being discriminated against.

Discrimination: The Bank of England report left open the possibility that, even after taking into account risk and information issues, there may exist a residual element of ethnic discrimination amongst finance providers. This discrimination could either be:

Direct discrimination this is discrimination against individuals based on the irrational prejudices of the finance provider. This discrimination would result in viable EMBs being systematically denied finance. Consequently the finance

provider would pay for its prejudice by losing out on the profits from lending to the viable EMBs. It follows that the less competitive is the market for financial

services the greater the scope for finance providers to indulge irrational prejudices. Statistical discrimination Lenders use sector, business characteristics, and information on the businesss behaviour in relation to its current account, to predict the risk that the business will default on a loan. This information helps lenders to decide whether to allocate credit, and if so, on what terms (risk-based discrimination). However it is likely that the lenders risk model will be an

incomplete description of risk. In this context ethnicity may act as a proxy for unobserved risk factors. This means that lenders decisions, which are directed at individuals within an ethnic group, will involve an assessment of the average risk of the group leading to statistical discrimination. It is possible therefore that a good EMB may find it harder to get a loan, than an otherwise similar whiteowned business, because their ethnic group is associated with higher risk types on average. However the lender is behaving rationally (i.e., maximizing profits) assuming the finance providers assessment of group risk is correct.

The issue of competition in the supply of financial services was highlighted alongside access to finance in section 2.1. As far as this author is aware, there is no hard However,

evidence regarding competition in the supply of financial services to EMBs.

this issue is of equal importance to, and indeed interacts with, the issue of access to finance. In general an absence of competition will lead to higher prices and poorer

30

service. EMBs may be particularly disadvantaged by a lack of competition if the supply of services to them is more concentrated than for WBs, and hence subjected to higher tariffs and poorer service. The issue of competition interacts with EMB access to finance in that (direct) ethnic discrimination is less likely in a highly competitive market for EMB financial services since financiers could less afford to indulge their prejudices. The issue of competition in the market for EMB financial services is discussed in Chapter Five. It is however out-with the scope of this report to analyze empirically the relationship between competition in financial markets and ethnic discrimination.

2.4 Key business and owner characteristics

The context for this analysis is to offer a preliminary view of some key risk factors which may account for ethnic variations in access to finance. In view of previous discussions the principal risk factors which are examined here are:

Firm size Sectoral concentrations. Experience and other human capital (academic and financial qualifications). Deprivation and availability of collateral.

Analyses of other business characteristics (other risk factors) are summarized later in this section. Information issues, which were highlighted by the Bank of England as a cause of perceptions of ethnic discrimination in financial markets, are discussed under financial relationships in Chapter Five. The issue of whether there is a residual

component of ethnic discrimination in access to finance, after controlling for financial relationships and other risk factors, is examined in Chapter Six.

Firm size

Tables A2.1 (employment size; see Appendix A) shows that:

EMBs are generally more likely to have employees than WBs.

31

In particular 69% of WBs have no employees, compared with only 5% of Bangladeshi businesses (this difference being statistically significant). Indeed WBs are significantly more likely to have no employees than all types of EMB.

At least regarding comparisons between WBs and Asian businesses, these employee size differences may reflect concentrations of Asian owned businesses in Wholesale and Retail. Also Asian owned businesses may have greater access to labour through strong social networks.

Table A2.2 (turnover) indicates that:

Indian owned businesses made almost 688,003 in sales in 2004-5. This is significantly higher than amongst Black Caribbean (164,650) and Black African (200,076) businesses. WBs averaged a turnover of 434,505 which is significantly higher than amongst Black owned businesses.

Smaller firms are usually viewed by finance providers as being more risky than larger firms. One reason for this is that smaller firms tend to keep fewer financial records making risk assessments more difficult for finance providers; and they may be more susceptible to shocks through concentration on a single product or service or reliance on one or two key individuals. Also smaller firms tend to be younger (implying a shorter track record) and have fewer financial assets (implying less available security), factors which increase lending risk: differences in age and assets are considered below. A further issue is that high lending fixed costs, specifically borrower screening and monitoring costs, can potentially make lending relatively small amounts unattractive to finance providers. However developments in credit scoring techniques have reduced the fixed costs of small business lending considerably in the last decade.

For these various reasons Indian owned businesses may be more attractive to finance providers than Black owned businesses due to size. Differences in turnover may also

explain better access to finance amongst WBs relative to Black owned businesses.

32

Figure 2.4.1: Firm size (employees)

100% 90.2% 90% 82.2% 80% 69.4% 61.6% 60% 0 1--9 10--49 50--249 87.6% 84.6%

70%

50%

40% 32.1% 30% 27.4%

20% 12.2% 10.0% 10% 4.6% 1.0% 0% Indian Pakistani Bangladeshi Black Caribbean Black African White 5.1% 2.2% 0.3% 4.7% 2.9% 0.3% 2.6% 0.6% 12.2% 5.8% 0.6%

Base=All businesses by ethnic group Indian=202 Pakistani=202 Bangladeshi=103 Black Caribbean=203 Black African=200 White=2,373

33

Figure 2.4.2: Firm size (average turnover)

Turnover () 800,000

700,000

688,003 628,658

600,000

500,000 434,505 400,000 342,641 300,000 Turnover ()

200,076 200,000 164,650

100,000

0 Indian Pakistani Bangladeshi Black Caribbean Black African White

Base: All businesses by ethnic group: Indian=202 Pakistani=202 Bangladeshi=103 Black Caribbean=203 Black African=200 White=2,373

Sectoral concentrations

Table A2.3 reports sectoral concentrations for EMBs and WBs. This table shows that:

Asian businesses are most heavily concentrated in Wholesale and Retail (Indian: 54.8%; Pakistani: 47.8%; Bangladeshi: 32.5%). significantly higher than amongst WBs (15.4%) These concentrations are

Bangladeshi businesses are also highly concentrated in Hotels and Restaurants (25.9%).

34

Black and White owned businesses are most heavily concentrated in Real Estate, Renting and Business Services (Black Caribbean: 25.7%; Black African: 41.6%; WBs: 36.1%).

Indeed Black African and White owned businesses are significantly more likely to operate in this sector than Asian businesses.

These results support previous evidence on the typical activities of Asian businesses. Also the sectoral distributions of Black and White owned businesses are broadly similar with these businesses clustering in a high value added sector of the economy. On this evidence sectoral concentrations may offer an explanation for differential access to finance between Asian owned businesses on the one hand and Black and White owned businesses on the other. However, sectoral concentrations would appear to be an

unlikely explanation for differences in access to finance between Black and White owned businesses.

35

Figure 2.4.3: Business Sectors

60% 54.8%

50%

47.8%

41.6% 40% 36.1% 32.5% 30% 25.7% 20.8% 26.1% 15.4% 20.3% 20% 19.7% 19.9% Health and Social Work Other Community, Social and Personal Services Education Manufacturing Construction Wholesale/Retail Hotels and Restaurants Transport, Storage and Communications Real Estate, Renting and Business Services

10%

0% Indian Pakistani Bangladeshi Black Caribbean Black African White

Base=All businesses by ethnic group Indian=202 Pakistani=202 Bangladeshi=103 Black Caribbean=203 Black African=200 White=2,373 Notes: Comparison of sector distributions are based on common sector classifications across the main and EMB surveys respectively. This therefore precludes comparisons of the following sectors: agriculture (main survey only); education (EMB survey only); and financial intermediation (EMB survey only).

The following tables report the distributions of business assets across sectors. It would be expected that businesses operating in sectors which generate small levels of fixed assets would be financially disadvantaged relative to businesses, with similar financing requirements, in sectors with higher asset levels. The reason for this is that lenders often require there to be some security on a loan and businesses with higher fixed asset levels are more able to comply with this requirement. Also, lenders prefer fixed to

intangible assets (such as intellectual property) since fixed assets can be more readily valued and sold in the event of default.

In this regard the following table reports the distributions of assets across sectors for EMBs and WBs. Wholesale/Retail and Real Estate, Renting and Business Services are

36

highlighted as these are the sectors with the heaviest concentrations of Asian and Black and White owned businesses respectively.

Table 2.4.1 indicates that:

The sectors in which EMBs and WBs are most heavily concentrated (Wholesale/Retail and Real Estate, Renting and Business Services) have similar levels of business assets around 200,000 worth on average (there being no statistically significant differences in the average asset levels of these sectors).

However the difference in average business assets of EMBs in construction (37,751) compared with the corresponding figure amongst WBs (146,652) is statistically significant.

Also EMBs in Transport, Storage and Communications have significantly lower asset levels than amongst WBs (55,340 versus 168,389).

At the level of business assets it would seem that there is a level playing field in terms of the principal EMB and WB sectors. This suggests, at the sectoral level, that differences in business assets are an unlikely principal explanation for ethnic variations in access to finance. Nonetheless this evidence on ethnic variations in business assets is only

indirect being intermediated by sector. Therefore direct evidence on ethnic variations in business assets are presented later in this section. Also, small businesses are often heavily reliant on the personal assets of the owner. In this regard variations in personal assets could play a further role in explaining ethnic differences in access to finance. Direct comparisons of personal assets by ethnic group are therefore also carried out later in this section.

37

Table 2.4.1: Average business assets by sector

All EMBs
Sector Manufacturing Construction Wholesale/Retail Hotels and Restaurants Transport, Storage and Communications Real Estate, Renting and Business Services Health and Social Work Other Community, Social and Personal Services Education Financial Intermediation
Base: All EMBs by sector: Manufacturing=108 Construction=34 Wholesale/Retail=310 Hotels and Restaurants=60 Transport, Storage and Communications=53 Real Estate, Renting and Business Services=235 Health and Social Work=42 Other Community, Social and Personal Services=37 Education=19 Financial Intermediation=12

Average business assets () 173,495.7 37,751.1 213,243.2 229,893.2 55,340.2 200,151.0

Std. Err.

[95% Conf.

Interval]

32,330.7 13,871.1 30,702.2 62,100.4 18,810.2 75,905.7

109,255.3 8,984.2 152,781.0 105,539.4 173,23.3 50,463.7

237,736.0 66,518.0 273,705.3 354,247.1 93,357.0 349,838.2

337,426.2 139,075.1

137,929.0 53,919.3

56,807.5 28,957.2

618,044.9 249,193.1

16,452.9 38,377.3

6,866.5 24,008.6

1,725.7 -14,463.0

31,180.1 91,218.6

38

White
Sector Agriculture Manufacturing Construction Wholesale/Retail Hotels and Restaurants Transport, Storage and Communications Real Estate, Renting and Business Services Health and Social Work Other Community, Social and Personal Services
Base: All White businesses by sector: Agriculture=191 Manufacturing=204 Construction=371 Wholesale/Retail=365 Hotels and Restaurants=184 Transport, Storage and Communications=201 Real Estate, Renting and Business Services=440 Health and Social Work=167 Other Community, Social and Personal Services=250

Average business assets () 439,273.1 320,019.6 146,652.1 653,465.9 406,294.8 168,388.6 182,530.5

Std. Err.

[95% Conf.

Interval]

51,157.2 46,827.1 35,892.3 260,302.7 58,877.9 27,402.0 32,315.3

338,283.6 227,651.8 76,036.5 141,326.6 290,027.6 114,307.7 118,997.1

540,262.6 412,387.5 217,266.8 1,165,605.0 522,561.9 222,469.4 246,063.9

132,177.3 236,232.0

19,295.8 80,795.7

94,030.8 76,974.8

170,323.7 395,488.2

Another reason why sector is important for lenders risk assessments is that sunk costs vary over sectors. These are irrecoverable costs, associated with investment in plant and equipment which cannot be put to uses other than in the current venture. In sectors with high sunk costs, such as the manufacture of specialised goods, business assets cannot be easily transferred to another use. The entrepreneur is therefore more likely to be committed to making the current business a success since alternative uses of the firms assets are limited. From the lenders perspective there is less risk that the

entrepreneur will be inclined to give up on the current venture. However in sectors with low sunk costs there is more risk to the lender since the entrepreneur can give up the current business with little financial penalty: taxi driving and running a market stall are good examples of this.

39

A related issue is that sectors with low sunk costs are likely to be highly competitive since the barriers to entry are low. Profitability, and the chances of survival, in these sectors is therefore likely to be low. In other words the potential returns in these sectors are low and risk is high making investment unattractive to outside investors.

In this context the following table looks at the return on assets (profits divided by assets) across EMB and WB sectors. Wholesale and Retail and Real Estate, Renting and

Business Services are again highlighted. Table 2.4.2 shows that:

EMBs in Wholesale and Retail (most likely Asian owned businesses) earn on average 80 pence per pound of total assets (which is the same as amongst WBs).

EMBs in Real Estate, Renting and Business Services (most likely Black owned businesses) earn 1.70 per pound of total assets. WBs, in the same sector, earn about 2.80 per pound of total assets. However, this profitability is not significantly higher than amongst EMBs.

The indication from these results is that Black and White owned businesses tend to operate in a sector which is highly profitable. Asian owned businesses, on the other hand, are most commonly found in a sector which is significantly less profitable. Businesses in Real Estate, Renting and Business Services may therefore be more likely to attract external investors than businesses in Wholesale and Retail. The entry barriers (sunk costs) which help to maintain the higher profitability of businesses in Real Estate, Renting and Business Services may include specialised training and qualifications required to run businesses in these sectors.

40

Table 2.4.2 Profitability (average return on assets) by sector

All EMBs
Sector Manufacturing Construction Wholesale/Retail Hotels and Restaurants Transport, Storage and Communications Real Estate, Renting and Business Services Health and Social Work Other Community, Social and Personal Services Education Financial Intermediation
Base: All EMBs by sector: Manufacturing=108 Construction=34 Wholesale/Retail=310 Hotels and Restaurants=60 Transport, Storage and Communications=53 Real Estate, Renting and Business Services=235 Health and Social Work=42 Other Community, Social and Personal Services=37 Education=19 Financial Intermediation=12

Average return on assets 0.5 1.2 0.8 0.5 1.4 1.7

Std. Err.

[95% Conf.

Interval]

0.1 0.6 0.1 0.3 0.5 0.3

0.2 -0.2 0.5 -0.1 0.3 1.2

0.8 2.5 1.0 1.1 2.4 2.2

1.7 1.4

0.7 0.5

0.2 0.4

3.1 2.3

1.3 1.5

0.4 0.4

0.3 0.2

2.3 2.7

41

White
Sector Agriculture Manufacturing Construction Wholesale/Retail Hotels and Restaurants Transport, Storage and Communications Real Estate, Renting and Business Services Health and Social Work Other Community, Social and Personal Services
Base: All White businesses by sector: Agriculture=191 Manufacturing=204 Construction=371 Wholesale/Retail=365 Hotels and Restaurants=184 Transport, Storage and Communications=201 Real Estate, Renting and Business Services=440 Health and Social Work=167 Other Community, Social and Personal Services=250

Average return on assets 0.6 1.1 2.1 0.8 0.7 0.8 2.8

Std. Err.

[95% Conf.

Interval]

0.2 0.2 0.3 0.1 0.2 0.1 0.5

0.3 0.7 1.6 0.6 0.3 0.5 1.8

0.9 1.5 2.7 1.0 1.1 1.1 3.8

2.3 1.8

0.5 0.3

1.3 1.2

3.2 2.5

Human capital

A variety of academic qualifications and business experience are examined under the heading of human capital. Whether an academic or vocational qualification, or indeed business experience, is a more relevant measure of the skills required to run a business will depend on the nature of the business. A PhD in a relevant field may be important for running a high technology business whilst a vocational qualification or experience may be more relevant in other cases.

42

Table A2.4 reports owners highest academic qualifications. This table shows that:

About 20% of Indian owner-managers have an undergraduate degree (but not significantly higher than WBs amongst which about 12% of owners have an undergraduate degree).

22% of Pakistani owner managers have an undergraduate degree (significantly higher than amongst WBs). 28% of Bangladeshi owner managers have an undergraduate degree (significantly higher than amongst WBs). However the highest qualification of Black Caribbean owner managers tends to be O-levels (18%). Black African owner managers are the most highly educated group with 37% having a postgraduate degree and 24% having an undergraduate degree (both significantly higher than amongst WBs).

Indeed 15% of White owner managers have no qualifications (a significantly higher figure than amongst Black African businesses).

43

Figure 2.4.4: Highest academic qualification of owner-manager

Academic Qualifications (Indian Owned Businesses)

1% 0% 4% 1% 0% 8%

15%

11% No academic qual. O-levels A-levels HND/HNC City and Guilds/NVQ 14% Professional qual. Undergraduate degree Postgraduate degree

20%

Diploma/Certificate Apprenticeship/trade qual. Teaching Qualification Other 5% 16% Don't know

5%

Academic Qualifications (Pakistani Owned Businesses)

4%

2% 0%

3%

9%

11%

No academic qual. O-levels

19% A-levels HND/HNC City and Guilds/NVQ 8% Professional qual. Undergraduate degree Postgraduate degree 6% Diploma/Certificate Apprenticeship/trade qual. Teaching Qualification 5% 22% 10% Other Don't know

44

Academic Qualifications (Bangladeshi Owned Businesses)

3% 2% 0%

3% 12%

16% 15%

No academic qual. O-levels A-levels HND/HNC City and Guilds/NVQ Professional qual. Undergraduate degree Postgraduate degree 9% Diploma/Certificate Apprenticeship/trade qual. Teaching Qualification 28% 3% 6% 4% Other Don't know

Academic Qualifications (Black Caribbean Owned Businesses)

1% 0% 3% 2%

1% 11%

12% No academic qual. O-levels 18% A-levels HND/HNC 12% City and Guilds/NVQ Professional qual. Undergraduate degree Postgraduate degree Diploma/Certificate 7% 8% Apprenticeship/trade qual. Teaching Qualification Other 10% 15% Don't know

45

Academic Qualifications (Black African Owned Businesses)

2% 3% 0% 4% 4% 2% 6% No academic qual. 4% O-levels A-levels HND/HNC 37% City and Guilds/NVQ Professional qual. 16% Undergraduate degree Postgraduate degree Diploma/Certificate Apprenticeship/trade qual. Teaching Qualification Other Don't know 24%

Academic Qualifications (White Owned Businesses)

1% 2% 0% 1% 9%

4% 15%

No academic qual. O-levels A-levels 14% HND/HNC City and Guilds/NVQ Professional qual. Undergraduate degree Postgraduate degree Diploma/Certificate 9% 13% 6% 14% Apprenticeship/trade qual. Teaching Qualification Other Don't know

12%

Base=All businesses by ethnic group Indian=202 Pakistani=202 Bangladeshi=103 Black Caribbean=203 Black African=200 White=2,373

46

The following table of years of business experience shows that:

White owner managers have the highest average levels of business experience (20.6 years). This is significantly higher than amongst Pakistani (13.8 years), Bangladeshi (11.5 years), Black Caribbean (10.8 years) and Black African (10.5 years) businesses.

This experience appears to compensate for the lack of academic qualifications amongst WBs. In contrast, Black African owner managers, which have the highest academic qualifications, have the lowest levels of business experience (significantly lower than amongst Indian, Pakistani and White owned businesses).

These results indicate there is a trade off between accumulating academic qualifications versus gaining business experience. In effect time spent in education is time not spent gaining business experience. To the extent that finance providers value practical

business experience more than academic qualifications White owned businesses may be more successful than Black African businesses in accessing finance despite the high levels of human capital amongst Black African entrepreneurs.

Table 2.4.3: Average years of business experience

Average years of experience Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: All businesses by ethnic group Indian=202 Pakistani=202 Bangladeshi=103 Black Caribbean=203 Black African=200 White=2,373

Std. Err. 0.8 0.8 0.9 0.6 0.6 0.5

[95% Conf. 16.0 12.3 9.7 9.6 9.4 19.6

Interval] 19.2 15.3 13.4 12.1 11.6 21.5

17.6 13.8 11.5 10.8 10.5 20.6

47

Figure 2.4.5: Average years of business experience

Business Experience
25

20.6 20 17.6

15

13.8 11.5 10.8 10.5 Average Years of Experience

10

0 Indian Pakistani Bangladeshi Black Caribbean Black African White

Base: All businesses by ethnic group Indian=202 Pakistani=202 Bangladeshi=103 Black Caribbean=203 Black African=200 White=2,373

In summary Black African owners are the most highly formally educated group. Other things being equal, this human capital should raise the performance of the business relative to the less educated group of White owner managers and increase access to finance. However to the extent that finance providers value business experience over academic qualifications then WBs could have an important advantage over EMBs.

48

Availability of collateral and deprivation

The section begins with direct comparisons of business and personal assets by ethnic group. The following table of business assets shows that:

Indian and Pakistani businesses have the highest level of business assets (589,786 and 306,644 respectively). In this regard Pakistani businesses have significantly higher asset levels than Black Caribbean (65,156) and Black African (79,091) businesses. Indeed Black owned businesses also have significantly lower asset levels than WBs (268,640).

Table 2.4.4: Average business assets

Average assets () Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: All businesses reporting assets: Indian=175 Pakistani=175 Bangladeshi=92 Black Caribbean=157 Black African=163 White=2,121

Std. Err. 266,618.3 82,764.2 24,387.3 10,081.6 16,027.4 41,891.5

[95% Conf. 62,563.8 143,293.4 68,664.9 45,242.5 47,441.4 186,487.2

Interval] 1,115,008.0 469,995.3 165,549.5 85,070.5 110,740.6 350,792.8

588,786.1 306,644.4 117,107.2 65,156.5 79,091.0 268,640.0

49

Figure 2.4.6: Average business assets

800,000

700,000

688,003 628,658

600,000

588,786

500,000 434,505 400,000 342,641 306,644 300,000 268,640 Turnover () Assets ()

200,076 200,000 117,107 100,000 65,156 79,091 164,650

0 Indian Pakistani Bangladeshi Black Caribbean Black African White

Bases: All businesses reporting current turnover: Indian=182 Pakistani=144 Bangladeshi=62 Black Caribbean=129 Black African=129 White=2,136 All businesses reporting assets: Indian=175 Pakistani=175 Bangladeshi=92 Black Caribbean=157 Black African=163 White=2,121

Regarding personal assets the following table indicates that:

Pakistani owner-managers have the most personal assets on average (439,180) which is significantly higher than amongst Bangladeshis (201,239), Black Caribbean (159,594) and Black Africans (218,767)

50

Indeed Bangladeshi and Black Caribbeans also have significantly lower personal assets than amongst Indians (385,932). Further, Black Caribbeans have significantly lower personal assets than amongst WBs (323,995)

Table 2.4.5: Owner-manager net worth (average personal assets)

Average net worth () Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: All businesses reporting ownermanagers net worth: Indian=140 Pakistani=129 Bangladeshi=80 Black Caribbean=149 Black African=141 White=1,629

Std. Err. 47,121.4 102,327.5 37,923.4 24,264.8 47,886.6 24,801.4

[95% Conf. 292,764.4 236,707.8 125,754.3 111,644.1 124,092.3 275,349.3

Interval] 479,099.2 641,652.6 276,723.5 207,544.7 313,441.1 372,641.3

385,931.8 439,180.2 201,238.9 159,594.4 218,766.7 323,995.3

51

Figure 2.4.8: Average net worth of owner-manager

Average Net Worth ()

500,000

450,000

439,180

400,000

385,931

350,000 323,995 300,000

250,000 218,767 201,239 200,000 159,594 150,000

Average Net Worth ()

100,000

50,000

0 Indian Pakistani Bangladeshi Black Caribbean Black African White

Base: All businesses reporting owner-managers net worth Indian=140 Pakistani=129 Bangladeshi=80 Black Caribbean=149 Black African=141 White=1,629

These results suggest that variations in business and personal assets may play an important role in explaining ethnic variations in access to finance. In particular higher asset levels amongst Indian and Pakistani businesses may point to greater success in accessing finance compared with Black owned businesses.

52

The above evidence suggests that some ethnic groups are more deprived of financial resources than others. However an absence of financial resources is only one aspect of deprivation. An absence of, for example, jobs, skills, good health and decent housing will also limit the opportunities available to individuals. In this context the Office of the Deputy Prime Minister has published an index of multiple deprivation for England. This index is formed as a weighted aggregate of 7 domains of deprivation:

Income deprivation Employment deprivation Health deprivation and disability Education, skills and training deprivation Barriers to housing and services Living environment deprivation Crime

Each domain is comprised of a number of indicators of deprivation which are relevant to the domain. From these indicators a deprivation score is obtained where larger scores denote greater levels of deprivation. A deprivation rank is obtained from these scores which assigns a rank of unity to the most deprived area and a rank of 32,482 (which equals the number of Super Output Areas in England) to the least deprived area. It is

the deprivation rank which is used in the following analysis and in the remainder of this report.

The following table reports the mean deprivation ranks of ethnic groups. This shows that:

WBs tend to be situated in areas which are less deprived than the areas in which EMBs are situated. In particular Bangladeshi businesses tend to be located in the most deprived areas. Black Caribbean businesses tend to be located in the second most deprived areas.

53

These results show that businesses with the fewest financial assets (i.e., Bangladeshi and Black Caribbeans) tend also to be located in the most deprived areas. This

suggests that Bangladeshi and Black Caribbean owned businesses may be severally disadvantaged by an absence of financial, economic and social resources relative to other ethnic groups.

Table 2.4.6: Deprivation rank (England only)

Mean rank Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: All businesses in England by ethnic group: Indian=182 Pakistani=194 Bangladeshi=94 Black Caribbean=187 Black African=195 White=1,814

Std. Err. 706 473 664 534 453 412

[95% Conf. 8,580 5,963 4,366 5,770 6,311 17,499

Interval] 11,364 7,829 7,003 7,878 8,099 19,114

9,972 6,896 5,684 6,824 7,205 18,306

Businesses in deprived areas are more likely to have been set up as a response to economic necessity and will have fewer resources available to them. These businesses may therefore tend to be marginal in character and their performance may accordingly tend to be poorer than businesses situated in wealthier areas. To examine this

hypothesis the following table looks at the performance of businesses located in different quartiles of the distribution of deprived areas. The performance measure reported in the following table is the return on assets (profits divided by business assets).

The results in the following table show that:

The return on assets in the most deprived areas is 80 pence per 1 of business assets (amongst EMBs). The return on assets in the wealthiest areas is 2.20 per 1 of business assets (amongst EMBs).

54

In other words, amongst EMBs, business performance appears to increase as the level of deprivation decreases (although the difference in return on assets between the lowest and highest deprivation quartile is not statistically significant). Indeed, a similar pattern of performance and deprivation is also noted amongst WBs. Overall, this offers some support to the idea that deprivation is associated with poorer business performance.

Table 2.4.7: Average return on assets by deprivation quartile

All EMBs
Deprivation quartile First quartile (0-25%) Second quartile (26%-50%) Third quartile (51%75%) Fourth quartile (76%100%)
Base: All EMBs in England by deprivation quartile: First quartile=561 Second quartile=199 Third-quartile=61 Fourth quartile=31

Average return on assets 0.8 1.2 1.3 2.2

Std. Err.

[95% Conf.

Interval]

0.1 0.2 0.4 0.9

0.7 0.8 0.4 0.3

1.0 1.5 2.2 4.1

WBs
Deprivation quartile First quartile (0-25%) Second quartile (26%-50%) Third quartile (51%75%) Fourth quartile (76%100%)
Base: All WBs in England by deprivation quartile: First quartile=481 Second quartile=482 Third quartile=481 Fourth quartile=482

Average return on assets 1.1 1.3 1.5 1.8

Std. Err.

[95% Conf.

Interval]

0.2 0.2 0.2 0.2

0.7 0.8 1.0 1.4

1.5 1.8 1.9 2.2

55

Figure 2.4.8: Average return on assets by deprivation quartile

2.5

2.2

2.0 1.8

1.5 1.3 1.3 1.1 1.0 0.8 1.2

1.5

Return on assets: EMBs Return on assets: WOBs

0.5

0.0 Bottom 25% Mid-bottom 25% Mid-top 25% Top 25%

Base: All businesses in England by EMB/WOB and deprivation quartile. EMBs: First quartile=561 Second quartile=199 Third-quartile=61 Fourth quartile=31 WBs: First quartile=481 Second quartile=482 Third quartile=481 Fourth quartile=482

These results on wealth and deprivation confirm previous studies in showing that Bangladeshi and Black Caribbean businesses have the fewest financial resources and are located in the most deprived areas. This deprivation is also shown to compromise performance which will limit these businesses ability to access external finance.

56

2.5 Summary of other business characteristics

This chapter concludes by looking at ethnic variations in other business characteristics which could influence access to finance. These characteristics are tabulated in full in Appendix A.

Business age

Table A2.5 shows that:

The average age of WBs is about 18.5 years (significantly older than all ethnic groups apart from Indians). Indian owned businesses average around 16 years of age (significantly older than all ethnic groups apart from WBs). There is a large drop to the next oldest group, Pakistani owned businesses, which have an average age of just over 8 years Bangladeshi and Black African businesses are the youngest averaging around 7 and 6 years of age respectively.

Also Figure 2.5.1 shows that:

Indian and White business groups have the lowest proportion of start-ups: around 1 in every 20 businesses in these groups is aged less than 2 years. This is significantly lower than the percentage of start-ups amongst all other ethnic groups.

In this regard more than 1 in 3 Bangladeshi businesses are aged less than 2 years.

Entrepreneurship is often regarded as a learning process. 8 Initially there may be large uncertainty about the talents of the entrepreneur and the demand for the firms product (markets). With the passage of time these uncertainties become resolved with the less talented or fortunate exiting the market leaving behind the most talented (and luckiest)
8

This view has been expressed by writers in the Austrian school of entrepreneurship theory such as von Hayek and Kirzner.

57

entrepreneurs. In other words risk will tend to diminish with business age making older businesses more attractive investment propositions than younger ones. In addition

younger businesses will tend to have accumulated fewer assets to use as loan security which may further hamper their access to finance.

In regard of business age Indian and White owned businesses have a clear advantage in financial markets over businesses from other ethnic groups. Bangladeshi and Black African businesses would appear to be particularly vulnerable on account of their youth.

Figure 2.5.1: Percentage of start-ups and established businesses

100% 95.7% 93.2% 90% 83.3% 80% 75.7% 71.2% 70% 66.0%

60% < 2years 2 years +

50%

40% 34.0% 30% 24.3% 20% 16.7% 28.8%

10% 4.3% 0% Indian Pakistani Bangladeshi Black Caribbean Black African

6.8%

White

Base=All businesses by ethnic group Indian=202 Pakistani=202 Bangladeshi=103 Black Caribbean=203 Black African=200 White=2,373

58

Profitability and growth

Table A2.6 suggests that:

WBs are the most profitable: each 1 of assets invested in these businesses generates a profit of 1.90. This is significantly higher than the profitability of Bangladeshi (0.50 per 1) and Black African businesses (0.80 per 1).

Table A2.7 suggests that:

Black African and Pakistani business groups have the highest proportion of businesses averaging sales growth of 30 percent or more per annum (33.0% and 30.1% respectively).

This is significantly higher than the percentage of high growth businesses amongst WBs (10.2%).

Variations in profitability would seem to be a plausible possible explanation for differences in access to finance. In this regard WBs appear to have an advantage over Bangladeshi and Black African businesses.

High growth is a double-edged sword. On the one hand growth increases the potential returns to investors. On the other hand high growth is associated with higher risk.

Finance providers response to high growth (i.e., increase or decrease the supply of finance) will therefore depend on their attitude to risk. 9 Accordingly, whether high growth places Black African and Pakistani businesses at a relative advantage or disadvantage in financial markets is not immediately apparent.

Indeed some high growth firms may be more suited to equity finance than debt finance. However there is insufficient data on equity finance users to determine whether high growth EMBs are more likely to use this type of finance.

59

Figure 2.5.2: Profitability (average return on assets)

Return on assets 2

1.9

1.8 1.6 1.6

1.4

1.3

1.2

1.1 Return on assets 0.8

0.8

0.6

0.5

0.4

0.2

0 Indian Pakistani Bangladeshi Black Caribbean Black African White

Base: All businesses by ethnic group reporting both profit and asset figures: Indian=128 Pakistani=116 Bangladeshi=48 Black Caribbean=68 Black African=79 White=1,574

60

Figure 2.5.3: High growth businesses

Turnover Growth of 30% or more per annum
35% 33.0% 30.1% 30%

25% 22.9%

20% 17.9% 16.9% 15% Percentage with Turnover Growth of 30% or more per annum

10.2% 10%

5%

0% Indian Pakistani Bangladeshi Black Caribbean Black African White

Base: All businesses reporting at least 2 years of reported turnover figures: Indian=182 Pakistani=144 Bangladeshi=61 Black Caribbean=127 Black African=127 White=2,073

Organization and ownership

Regarding organization, Table A2.8 shows that:

Sole trading/proprietorship is the most common form of organization for WBs (66.2%; significantly higher than amongst all EMBs). Only 23.9% WBs are limited liability companies (significantly lower than amongst all EMBs). Indeed amongst EMBs company status is the most common organizational form (for example accounting for 75.2% of Black African businesses).

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Regarding ownership (Table A2.9 and A2.10):

84.4% of Indian owned businesses are family owned (significantly higher than amongst Black Caribbeans: 60.8%). Across ethnic groups around a quarter of businesses are majority owned by females However only 13.7% of Bangladeshi businesses are majority owned by females which is significantly lower than amongst Black Caribbean (31.8%) and Black African (31.1%) businesses.

In addition Table A5.11 shows that:

25.3% Black Caribbean businesses have a female principal owner (which is significantly higher than amongst Asian businesses). Indeed, amongst Bangladeshi businesses only 3% have a female principal owner.

A desire for independence is a strong motivation for many entrepreneurs. This desire may conflict with sharing control of the business with external investors. Accordingly some entrepreneurs may prefer to set up as a sole trader, rather than as a company, because of an aversion to external control. In this regard the business may be run to satisfy the non-financial preferences of the entrepreneur rather than to maximize profits. The business will accordingly appear riskier to finance providers to the extent that nonfinancial objectives are part of the firms raison detre. 10 Family ownership may be

another risk factor inasmuch as it is a manifestation of control aversion and non-profit objectives. On the other hand family owned businesses may be bolstered by the

strength of social networks. This may strengthen performance and make the business more attractive to external financiers

10

However, to the extent that personal assets are at risk in the event of bankruptcy, sole traders may appear to lenders to be less risky than companies. Analysis of SFLG data indicates that sole traders have default rates which are substantially below those of companies. This suggests that the possibility of losing ones house and other possessions in the event of bankruptcy encourages sole traders to make every effort to ensure the business is a success (see Graham, 2004).

62

Gender is often viewed as a further obstacle to obtaining finance. 11 In this regard there is little variation across ethnic groups in terms of majority female ownership (with the exception of Bangladeshi businesses). However, there is greater variation in the gender of the principal owner across ethnic groups. The fact that 25% of Black Caribbean

businesses have a female principal owner may pose additional obstacles for this group over and above ethnicity and deprivation.

Figure 2.5.4: Legal forms

80% 75.2%

70% 63.4% 60% 55.4%

66.2%

50% 44.7% 40% 35.0% 34.0%

46.4%

46.1% sole trader partnership limited liability ppartnership limited liability company

30% 25.9% 23.9% 20% 17.8% 18.7%

10% 2.5% 0% Indian

7.6% 3.1%

9.1% 6.1% 4.6% 5.3% 2.3% 3.6% 2.5%

0.9% White

Pakistani

Bangladeshi

Black Caribbean

Black African

Base: All businesses by ethnic group Indian=202 Pakistani=202 Bangladeshi=103 Black Caribbean=203 Black African=200 White=2,373

Although Fraser (2005) found no evidence that female owned businesses suffer poorer access to finance than male owned businesses.
11

63

Figure 2.5.5: Ownership structure

90% 84.4% 80%

76.6%

76.3% 69.0% 66.9% 60.8%

70%

60%

50% Majority family owned Majority female owned 40% 31.8% 30% 24.9% 20% 13.7% 10% 24.2% 24.9% 31.1%

0% Indian Pakistani Bangladeshi Black Caribbean Black African White

Majority family owned businesses. Base: Partnerships and limited companies by ethnic group Indian=140 Pakistani=158 Bangladeshi=69 Black Caribbean=116 Black African=166 White=1,600 Majority female owned businesses. Base: All businesses by ethnic group. Indian=202 Pakistani=202 Bangladeshi=103 Black Caribbean=203 Black African=200 White=2,373

64

Figure 2.5.6: Gender of principal owner

100% 92.2% 90% 87.7% 85.1% 81.5% 80% 74.7% 70% 97.0%

60% Male Female

50%

40%

30%

25.3% 18.5% 14.9% 12.3%

20%

10%

7.8% 3.0%

0% Indian Pakistani Bangladeshi Black Caribbean Black African White

Base=All businesses by ethnic group Indian=202 Pakistani=202 Bangladeshi=103 Black Caribbean=203 Black African=200 White=2,373

Summary

This chapter has highlighted significant variations in entrepreneurial activities across ethnic groups. In particular self-employment rates vary from 21% in the Pakistani

community down to 6% in Black communities.

There are several possible reasons for these differences which include variations in access to finance, access to markets, social networks and deprivation across ethnic groups. The focus of this report is the issue of access to finance. In this regard,

65

previous studies have shown that EMBs, and in particular Black owned businesses, are at a disadvantage relative to WBs. This disadvantage may limit the ability of individuals from ethnic communities to take up business opportunities or constrain EMB growth and survival prospects.

However, ethnic discrimination amongst finance providers is only one of many reasons which could explain differences in access to finance. The analysis in this chapter has shown that EMBs, and in particular Bangladeshi and Black owned businesses, are smaller, younger and have fewer assets than WBs. These factors will make some EMBs appear riskier to finance providers which will reduce their willingness to lend to these EMBs or, alternatively, may result in the application of more stringent loan terms. Offsetting this higher risk the analysis has also shown that owners of EMBs in general and Black African business owners in particular, have higher academic qualifications than White business owners. These differences may reduce the risk of lending to EMBs relative to WBs. On the other hand WBs have significantly higher experience levels than non-Indian EMBs which may be a more relevant measure of human capital differences in a business context (in which case WBs will appear less risky than non-Indian EMBs). A multivariate analysis of EMB finances, controlling for a broad range of risk factor, will be conducted in chapter six to examine the residual role of ethnicity in explaining differences in access to finance.

This chapter has also highlighted that EMBs tend to be located in more economically and socially deprived area than WBs. This is particularly the case for Bangladeshi and Black Caribbean businesses. These businesses are more likely to be run out of

economic necessity rather than to exploit a business opportunity. In this regard, the analysis shows that deprivation worsens business performance. Accordingly deprivation may be an additional risk factor in explaining differences in access to finance.

66

The following chapter goes on to look at the motivations for running a business and a general range of business problems, including access to finance, across ethnic groups.

Chapter Two: summary of key significant findings: Firm size: WBs are more likely to have no employees than all types of EMB. Indian owned businesses made almost 688,003 in sales in 2004-5, higher than amongst Black Caribbean (164,650) and Black African (200,076) businesses. WBs averaged a turnover of 434,505 which is higher than amongst Black owned businesses. Sectors: Asian businesses are most heavily concentrated in Wholesale and Retail (Indian: 54.8%; Pakistani: 47.8%; Bangladeshi: 32.5%). These concentrations are significantly higher than amongst WBs (15.4%). Black and White owned businesses are most heavily concentrated in Real Estate, Renting and Business Services (Black Caribbean: 25.7%; Black African: 41.6%; WBs: 36.1%). Human capital: Black African owner managers are the most highly educated group with 37% having a postgraduate degree and 24% having an undergraduate degree (both significantly higher than amongst WBs). 15% of White owner managers have no qualifications (a significantly higher figure than amongst Black African businesses). However White owner managers have the highest average levels of business experience (20.6 years). This is higher than amongst Pakistani (13.8 years), Bangladeshi (11.5 years), Black Caribbean (10.8 years) and Black African (10.5 years) businesses. Assets Indian and Pakistani businesses have the highest level of business assets (589,786 and 306,644 respectively). In particular Pakistani businesses have significantly higher asset levels than Black Caribbean (65,156) and Black African (79,091) businesses. Black owned businesses also have significantly lower asset levels than WBs (268,640). Pakistani owner-managers have the most personal assets on average (439,180) which is significantly higher than amongst Bangladeshis (201,239), Black Caribbean (159,594) and Black Africans (218,767) Bangladeshi and Black Caribbeans also have significantly lower personal assets than amongst Indians (385,932). Black Caribbeans in addition have significantly lower personal assets than amongst WBs (323,995) Deprivation: WBs tend to be situated in areas which are less deprived than the areas in which EMBs are situated. Bangladeshi and Black Caribbean businesses tend to be located in the most deprived areas.

67

Start-ups: Indian and White business groups have the lowest proportion of start-ups: around 1 in every 20 businesses in these groups is aged less than 2 years. This is significantly lower than the percentage of start-ups amongst all other ethnic groups (about 1 in 4). Profitability: WBs are the most profitable: each 1 of assets invested in these businesses generates a profit of 1.90. This is significantly higher than the profitability of Bangladeshi (0.50 per 1) and Black African businesses (0.80 per 1). Growth: Black African and Pakistani business groups have the highest proportion of businesses averaging sales growth of 30 percent or more per annum (33.0% and 30.1% respectively). This is significantly higher than the percentage of high growth businesses amongst WBs (10.2%). Legal form: Sole trading is the most common form of organization for WBs (66.2%; significantly higher than amongst all EMBs). Only 23.9% WOBs are limited liability companies (significantly lower than amongst all EMBs). Indeed amongst EMBs, company status is the most common organizational form (for example accounting for 75.2% of Black African businesses). Ownership: 84.4% of Indian owned businesses are family owned (significantly higher than amongst Black Caribbeans: 60.8%). Only 13.7% of Bangladeshi businesses are majority owned by females which is significantly lower than amongst Black Caribbean (31.8%) and Black African (31.1%) businesses.

68

3. Business problems
This chapter reports evidence on the motivations for starting a business and the constraints faced by business owners in starting and growing their businesses. Specifically, analysis is presented for:

The main reason for starting in business (start-ups only). The main business problem at start-up (start-ups only). The extent of current business problems (all businesses).

Analysis of these responses will allow insights to be gained as to:

Why individuals from different ethnic groups start businesses? o o o Is it due to necessity (lack of job opportunities)? Instead, are individuals exploiting a business opportunity? Or are they drawn into business by life-style aspirations?

Whether some ethnic groups find it harder to start and run a business than other groups

Business owners may react in a number of ways to overcome obstacles. For example, business planning may make the business a more attractive proposition to outside investors and other stakeholders. Also, the owner may seek external advice or rely on internal capabilities to overcome problems. In this context analysis is also presented regarding:

Business planning (start-ups only) Sources of advice at start-up (start-ups only) Current sources of financial advice (all businesses). Owner-managers self-confidence in their abilities to deal with different business problems (sole traders and partnerships only).

69

Incidences of qualified financial management (sole traders and partnerships only).

A lack of internal resources or an unwillingness to seek external advice may limit businesses abilities to cope with problems. The issue here is whether particular ethnic groups have fewer resources to deal with the challenges of starting and running a business.

3.1 Main reason for starting in business

Owners of businesses aged less than two years at the time of the interviews (start-ups) were asked their main reason for starting in business. The list of responses included a range of push and pull factors. As discussed in Chapter 2, it would be expected that individuals pushed into running a business for want of opportunities in paid-employment would face greater problems than individuals who are pursuing a genuine business opportunity. The caveat with the following results is that the sample sizes are generally small, especially for Indian owned business (n=8).

Table A3.1 (see Appendix A) shows that:

Across Asian and WBs the main reason for starting a business is a desire to be ones own boss. In these ethnic groups, the percentages of start-ups reporting independence as their main reason are as follows o o o o Indian: 47.9% (n=8) Pakistani: 24.7% (n=31) Bangladeshi: 29.8% (n=34) White: 36.7% (n=141)

However amongst Black Caribbean businesses (n=46) the main reason for starting a business is to fulfil a lifes ambition (22.1%) And amongst Black African businesses (n=53) the main reason is because the owner believed they had a good business idea (20.5%)

70

Typically an explicit pecuniary incentive (to make money) is the second or third ranked motive for starting in business suggesting that explicitly financial motives are of secondary importance in deciding to start a business.

Incidences of necessity entrepreneurship (lack of job opportunities) are relatively low across all ethnic groups. Looking across all ethnic groups, fewer than 1 in 10 owners report lack of job opportunities as their main motive for starting in business.

Regardless of ethnicity, financial necessity is not a main reason for starting a business. Indeed running a business appears to be a luxury good 12 for all ethnic groups with lifestyle aspirations ranking above pecuniary motives or necessity.

Figure 3.1.1: Main reasons for starting in business

Main reason for starting in business (Indian owned businesses)

2% 16% 18%

To make money Had a good business idea 16% To be own boss To fulfil a lifes ambition Other

48%

12 The demand for luxury goods increases with an individuals income. To the extent that individuals have become entrepreneurs to satisfy lifestyle preferences, rather than to satisfy economic wants, this suggests that business ownership is a luxury afforded to relatively wealthy individuals.

71

Main reason for starting in business (Pakistani owned businesses)

4% 7% 0% 7%

11%

To make money Had a good business idea To be own boss 21% 11% To fulfil a lifes ambition Runs in the family Lack of job opportunities Opportunity presented itself Well qualified in the field Found a market 3% For business growth Other 3%

7% 25%

Main reason for starting in business (Bangladeshi owned businesses)

3% 9%

3% 21%

1% 3%

9% 12%

6%

To make money Had a good business idea To be own boss To fulfil a lifes ambition Runs in the family Lack of job opportunities Inherited business Frustrated with 9-5 Well qualified in the field Found a market For business growth Other Dont know

3%

30%

72

Main reasons for starting in business (Black Caribbean owned businesses)

11% 2%

9%

13% 7% To make money Had a good business idea To be own boss To fulfil a lifes ambition Lack of job opportunities Inherited business Frustrated with 9-5 Opportunity presented itself Well qualified in the field Found a market For business growth Other

4% 2%

7% 21% 2%

22%

Main reason for starting in business (Black African owned businesses)

2% 10% 14%

4% 2% 4% To make money Had a good business idea To be own boss To fulfil a lifes ambition Runs in the family 21% 8% Lack of job opportunities Inherited business Frustrated with 9-5 Opportunity presented itself Well qualified in the field 2% Found a market For business growth

18%

14%

73

Main reasons for starting in business (White owned businesses)

2% 8%

4% 14%

6%

5% To make money Had a good business idea

3% 3%

To be own boss To fulfil a lifes ambition Runs in the family Lack of job opportunities Inherited business Frustrated with 9-5 Opportunity presented itself Other

19% 37%

Base=Start-ups by ethnic group: Indian=8 Pakistani=31 Bangladeshi=34 Black Caribbean=46 Black African=53 White=141

3.2 Main problem at start-up

Owners of businesses aged less than two years at the interview data were asked about the range of issues they faced at start-up. These included a variety of resource issues (e.g., accessing finance, finding workers and premises), finding a market for goods or services, competition from other firms and dealing with red-tape. Once again there is a general health warning with the following results due to the modest sample sizes.

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Table A3.1 shows the following information:

Amongst Pakistani businesses the main problem was finding customers (24.7%) similar to WBs (25.9%). Less than 1% of Pakistani businesses report no problems at start-up, significantly lower than amongst WBs (21.2%). Bangladeshi businesses report finding sources of finance as their main problem at start-up (20.9%; but not significantly different from WBs: 10.6%). 9% of Bangladeshi businesses report no problems at start-up (which is not significantly different from WBs). Black Caribbean businesses also report finding sources of finance as their main problem at start-up (35.9%); this figure is significantly higher than amongst WBs (10.6%).

6.6% of Black Caribbean businesses report no problems (which is very close to being significantly different from WBs: 21.2%). Similarly the main problem for Black African businesses was finding sources of finance (32.6%) with 2.4% reporting no problems (although neither result is significantly different from the corresponding figures for WBs).

It is notable that Black Caribbean businesses (and Black African businesses to a lesser extent) are significantly more likely to have experienced problems with finance at startup than WBs. Indeed, WBs are also more likely to have experienced no problems at start-up than either Pakistani or Black African businesses.

75

Figure 3.2.1: Main problems at start-up

Main problem at start-up (Indian owned businesses)

16%

16%

16% 18%

Finding premises Cost of premises Cost of finance Coping with red-tape No problems Dont know

16%

18%

Main problem at start-up (Pakistani owned businesses)

7% 1% 4%

11%

11%

Finding premises Cost of premises Finding sources of finance Cost of finance Finding customers Wage bill Coping with red-tape Competition Lack of advice

18%

18% 4%

No problems Dont know

4%

25%

76

Main problem at start-up (Bangladeshi owned businesses)

3% 9%

6% 3%

6% Business planning 21% Cost of premises Finding sources of finance Cost of finance Finding customers 14% Availability of skilled workers Wage bill Coping with red-tape Competition Lack of advice 3% 6% No problems Dont know

3% 12%

15%

Main problem at start-up (Black Caribbean owned businesses)

7% 4%

7% 7%

7%

4% Business planning Finding premises Cost of premises Finding sources of finance Cost of finance Finding customers Availability of skilled workers Coping with red-tape Competition Lack of advice No problems

7%

4%

13%

36%

4%

77

Main problem at start-up (Black African owned businesses)

2% 8%

4%

2%

4%

12%

Business planning Finding premises 8% Cost of premises Finding sources of finance Cost of finance Finding customers 4% 2% 2% Availability of skilled workers Wage bill Coping with red-tape Competition Lack of advice No problems 33% Dont know

16%

2%

Main problem at start-up (White owned businesses)

5%

3%

4%

9%

21%

Business planning Finding premises Cost of premises Finding sources of finance 11% Cost of finance Finding customers Availability of skilled workers Wage bill 2% Coping with red-tape Competition Lack of advice

3%

4%

No problems Dont know 5% 1% 5% 26%

Base=Start-ups by ethnic group: Indian=8 Pakistani=31 Bangladeshi=34 Black Caribbean=46 Black African=53 White=141

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3.3 Extent of current business problems

All businesses were asked to rate the severity of their current business problems on a scale of 1 (no problem) to 10 (critical problem). Table A3.3 shows that:

Regardless of ethnicity, business owners are most likely to report no problems across a range of business operations. Asian business owners are also quite likely (between 15-20%) to report experiencing mid-level problems in running their businesses. Critical problems are comparatively rare. However 11.2% of Bangladeshi

businesses, 15.9% of Black Caribbean businesses and 23.9% of Black African businesses report critical problems with finances compared with 1.3% of WBs.

Figure 3.3.1: Extent of business problems (Summary: 1=no problem; 10=critical problem)
60% 55% 50% 45% 41.7% 40% 35% 30% 25% 18.6% 20% 15% 10% 5% 0% 1 no problem 10 critical problem 1 no problem 10 critical problem 1 no problem 10 critical problem 1 no problem 10 critical problem 1 no problem 10 critical problem 1 no problem 10 critical problem 3.0% 0.9% 3.7% 3.6% 12.2% 11.2% 6.3% 6.0% 4.7% 1.3% 20.7% 15.9% 37.1% 33.9% 31.8% 28.5% 32.5% 14.5% Production Sales Staffing Finance Red tape 39.8%

46.8%

33.0% 23.9%

Indian

Pakistani

Bangladeshi

Black Caribbean

Black African

White

Base: All businesses by ethnic group: Indian=202 Pakistani=202 Bangladeshi=103 Black Caribbean=203 Black African=200 White=2,373

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3.4 Coping with business problems at start-up

Having looked at start-up problems and the extent of current problems in running the business, attention is now turned to look at the various strategies used to deal with these problems. In this section analysis of the use of business planning and external advice at start-up are presented.

Table 3.4.1 shows that:

50% of Indian businesses and 51.2% of WBs wrote business plans at start-up. Slightly, but not significantly, higher percentages of Pakistani (61.2%) and Bangladeshi (58.2%) start-ups wrote business plans. 82.3% of Black Caribbean and 81.5% of Black African start-ups wrote business plans which figures are significantly higher than amongst WBs.

In view of the higher incidence of financial problems experienced by Black owned business (Table 3.2.1) it is possible that they are more likely to write a business plan in an attempt to increase their chances of accessing finance.

Table 3.4.1: Percentage of businesses which wrote a business plan at start-up

Main problem Indian Pakistani Bangladeshi Black Caribbean Black African White
Base=Start-ups by ethnic group: Indian=8 Pakistani=31 Bangladeshi=34 Black Caribbean=46 Black African=53 White=141

Percentage 50.0% 61.2% 58.2% 82.3% 81.5% 51.2%

Std. Err. 21.0% 9.3% 8.6% 5.7% 5.5% 6.8%

[95% Conf. 12.1% 41.5% 40.4% 67.8% 67.9% 37.9%

Interval] 87.9% 77.8% 74.2% 91.2% 90.2% 64.3%

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Table A3.4 reports the main sources of advice used at start-up. This table shows that:

35.7% of Pakistani and 32.8% of Bangladeshi businesses turned to friends and business associates for advice at start-up; the figure for Pakistani businesses is significantly higher than amongst WBs (9.6%).

24.3% of Black Caribbean businesses sought advice from a Business Link (although this is not significantly higher than other groups). 22.2% of Black African businesses sought advice from friends and family but again this is not significantly different than other groups. Across all ethnic groups there is a high likelihood of seeking no advice at start-up (in about a third of cases).

It might have been expected that Black owned businesses, which experienced the greatest problems at start-up, would be more likely to seek external assistance than other ethnic groups. However, this is not the case with Black owned businesses being as likely not to seek external support as other ethnic groups. This could reflect the independent streak that characterises entrepreneurs regardless of ethnicity. On the

other hand, Black business owners may feel there is nothing to gain from external support despite their apparent greater need for assistance.

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Figure 3.4.1: Main source of advice at start-up

Main source of advice at start-up (Indian owned businesses)

2% 16% 16%

16%

Friends/business associates Bank manager Accountant None Dont Know

50%

Main source of advice at start-up (Pakistani owned businesses)

35%

36% Friends/business associates Bank manager Accountant Business adviser Business Link Local authority None

4% 7% 11% 4% 4%

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Main source of advice at start-up (Bangladeshi owned businesses)

33%

33% Friends/business associates Bank manager Accountant Business adviser Potential customers Business Link None

3% 3% 3% 8%

4%

Main source of advice at start-up (Black Caribbean owned businesses)

7%

11%

4% 2% Friends/business associates 4% 29% 2% 2% Bank manager Accountant Business adviser Princes Trust Jobcentre Plus Business Link Local authority Chamber of Commerce None Dont Know

21% 11% 2%

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Main source of advice at start-up (Black African owned businesses)

22%

35% Friends/business associates Bank manager Accountant Solicitor Business adviser Business Link Local authority 14% Chamber of Commerce Trade association None

2% 2% 2% 6% 10% 6%

Main source of advice at start-up (White owned businesses)

2%

10%

Friends/business associates 17% Bank manager Accountant Solicitor 39% Business adviser Potential customers Commercial finance broker Jobcentre Plus Business Link Scottish Enterprise Invest Northern Ireland 11% Trade association None Dont Know 2% 1% 2% 3% 7% 1% 4% 2%

Base=Start-ups by ethnic group: Indian=8 Pakistani=31 Bangladeshi=34 Black Caribbean=46 Black African=53 White=141

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3.5 Coping with current business problems

In this section analysis is presented for owner managers self-confidence in dealing with current business problems, current sources of financial advice and incidences of qualified financial management.

Table A3.5 reports levels of self-confidence in dealing with different aspects of current business operations on a scale of 1 (no confidence) to 10 (complete confidence). This question was put to sole traders and partnerships only:

Business owners tend to have complete confidence in their own abilities across a range of business operations. In relation to the ethnic groups which reported finance as being currently a critical problem: 31% of Bangladeshi businesses, 28% of Black Caribbean businesses and 26% of Black African businesses have low self-confidence in dealing with finances (scored less than 5).

These percentages are higher than for other groups suggesting that low confidence in dealing with finances is associated with financial problems.

Table A3.6 reports current sources of financial advice. This table shows that:

Accountants are the main source of financial advice regardless of ethnicity (used by around 30% of businesses). Regarding the use of advice from friends and family, Bangladeshis (15.2%), Black Caribbeans (12.3%) and Black Africans (13.4%) are significantly more likely to use these sources than WBs (5.5%).

About a third of businesses use no financial advice this appears to vary little with ethnicity.

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Figure 3.5.2: Current main source of advice

Current main source of advice (Indian owned businesses)

5%

10%

29%

22%

Friends/business associates Bank manager Accountant Business adviser None Dont Know

1%

29%

Current main source of advice (Pakistani owned businesses)

1% 10%

34% 21% Friends/business associates Bank manager Accountant Business adviser Financial advisor None Dont Know

2% 3% 28%

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Current main source of advice (Bangladeshi owned businesses)

2% 13%

29%

Friends/business associates Bank manager Accountant 23% None Dont Know

28%

Current main source of business advice (Black Caribbean owned businesses)

1% 12%

29% Friends/business associates Bank manager 16% Accountant Business adviser Business Link Local authority Chamber of Commerce Financial advisor Other 2% 1% 2% 1% 6% 24% 4% None Dont Know

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Current main source of advice (Black African owned businesses)

13%

27%

Friends/business associates Bank manager Accountant 19% Solicitor Business adviser Business Link 1% 1% 4% Chamber of Commerce Internet searches None

4% 2% 25%

Current main business problem (White owned businesses)

4%

6%

16%

Friends/business associates 36% Bank manager Accountant Business adviser Financial advisor None Dont Know

31% 1% 3%

All businesses by ethnic group: Indian=202 Pakistani=202 Bangladeshi=103 Black Caribbean=203 Black African=200 White=2,373

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The following table reports incidences of qualified financial management (amongst sole traders and partnerships only). This table shows that:

18.0% of Indian, 13.2% of Black Caribbean and 15.1% of White owned businesses have qualified financial managers. These percentages are significantly lower than amongst Black African businesses (55.3%).

Based on this evidence, there is no clear relationship between qualified financial management and self-reported problems with finance. On the one hand, Indian and WBs have low incidences of qualified financial management and yet their financial problems are low. On the other hand, Black African businesses have high incidences of qualified financial management and yet their financial problems are, by their own account, high.

Table 3.5.1 Qualified financial management

Percentage Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: Sole traders and partnerships by ethnic group: Indian=104 Pakistani=72 Bangladeshi=45 Black Caribbean=104 Black African=47 White=1,222

Std. Err. 4.2% 6.0% 7.1% 3.4% 7.6% 1.8%

[95% Conf. 9.7% 22.3% 18.6% 6.5% 39.9% 11.5%

Interval] 26.3% 46.3% 47.3% 19.9% 70.6% 18.8%

18.0% 34.3% 33.0% 13.2% 55.3% 15.1%

Summary

The business owners in the sample, regardless of ethnicity, appear to have been drawn into entrepreneurship to fulfil life-style aspirations rather than being pushed into it due to economic necessity. Black-owned and Bangladeshi owned businesses report more

severe problems with finance, both at start-up and currently, than WBs. High rates of

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business planning amongst Black-owned businesses may reflect an attempt to overcome financial constraints. Also more than 1 in 2 Black African owned businesses have qualified financial managers which is higher than other ethnic groups. However, despite higher planning and financial management Black African business owners have relatively low levels of self-confidence in dealing with finances.

Chapter Three: summary of key significant findings: Business problems at start-up: Less than 1% of Pakistani businesses report no problems at start-up, significantly lower than amongst WBs (21.2%). Black Caribbean businesses also report finding sources of finance as their main problem at start-up (35.9%); this figure is significantly higher than amongst WBs (10.6%). Current business problems: However 11.2% of Bangladeshi businesses, 15.9% of Black Caribbean businesses and 23.9% of Black African businesses report critical problems with finances compared with 1.3% of WBs. Business planning at start-up: 50% of Indian businesses and 51.2% of WBs wrote business plans at start-up. Slightly, but not significantly, higher percentages of Pakistani (61.2%) and Bangladeshi (58.2%) start-ups wrote business plans. 82.3% of Black Caribbean and 81.5% of Black African start-ups wrote business plans which figures are significantly higher than amongst WBs. Financial management: 18.0% of Indian, 13.2% of Black Caribbean and 15.1% of White owned businesses have qualified financial managers. These percentages are significantly lower than amongst Black African businesses (55.3%).

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4. Finance
The previous chapter set out a range of problems faced by businesses from all ethnic backgrounds and the strategies used to cope with these problems. Finance emerged as a particular problem for Black owned, and to a lesser extent Bangladeshi, businesses. In this chapter the report begins its focus on analysis of finance issues. In particular analysis is presented for:

Use of external finance in the last 3 years. Types of financial products used in the last 3 years. Use of friends and family finance in the last 3 years. Use of credit cards (business and personal) in the last 3 years. Use of Small Firm Loan Guarantees in the last 3 years. Demand and supply of new finance in the last 3 years. The extent of finance gaps the difference between supply and demand. Financial rejection and discouragement. Self-reported consequences of financial rejection.

The principal aim of this chapter is to set out the bare facts regarding variations in the use of financial products and access to new finance over ethnic groups. However

analysis is also presented relating the use of financial products to the extent of financial distress being experienced by the business (see Table 3.3). The aim of this analysis is to examine how choices of financial products are constrained by the financial predicament of the business and how these constraints vary over ethnic groups.

The second half of the chapter looks at the issue of access to new finance: principally, the demand and supply of new finance and recent financial rejections. Since financial distress may be caused, or at least exacerbated, by the businesss failure to access new finance no attempt is made to explain access to new finance in terms of financial distress. However in Chapter Six there will be a full examination of the risk factors which

91

account for differences in access to new finance across EMBs (and the residual role of ethnicity in explaining access to finance).

4.1 Use of external finance

The following table summarizes the use of any external debt or equity finance in the last 3 years. 13 Table 4.1.1 highlights that:

Across most ethnic groups about 80% of businesses used some form of external finance. However, amongst Black African businesses the figure is 73% (although this is not significantly lower than amongst other ethnic groups).

Table 4.1.1: Use of external finance

Percentage Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: All businesses by ethnic group: Indian=202 Pakistani=202 Bangladeshi=103 Black Caribbean=203 Black African=200 White=2,373

Std. Err. 2.9% 3.0% 3.6% 2.9% 3.4% 1.6%

[95% Conf. 78.7% 75.0% 76.2% 74.0% 65.8% 77.0%

Interval] 90.1% 86.7% 90.7% 85.5% 79.1% 83.4%

85.3% 81.5% 84.8% 80.4% 73.0% 80.4%

This analysis encompasses the use of at least one of the following types of external finance in the last 3 years: overdrafts; term loans; leasing and/or hire-purchase; invoice finance; credit cards; equity finance; and grants.
13

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Table A4.1 (see Appendix A) reports the number of financial products used in the last 3 years. 14 This shows that:

Black Caribbean businesses most frequently use two financial products. Black African, Pakistani, Bangladeshi and White owned businesses most frequently use 3 financial products. Indian owned businesses most frequently use 4 financial products.

The implication of these results is that Indian owned businesses tend to be the most financially sophisticated whereas Black Caribbean businesses tend to have simpler financial arrangements. This may reflect the fact that Indian owned businesses tend to be larger and older than Black Caribbean businesses.

Figure 4.1.1: Number of financial products

0.4

0.35

33.5% 31.5%

0.3

28.5%

28.4%

28.3%

27.7% 0 1 2 3 4 5 6 7 8

0.25 22.5% 20.9% 0.2

24.9% 23.7% 22.3% 20.9%

24.6% 23.3% 20.7% 17.9% 14.8% 21.1% 18.3%

0.15 12.1% 0.1 12.6%

13.2% 11.4%

12.5%

12.0% 10.8% 8.2%

8.5% 6.4% 5.1%

0.05 1.8% 1.8% 0.7% 0 Indian

Base: All businesses by ethnic group: Indian=202 Pakistani=202 Bangladeshi=103 Black Caribbean=203 Black African=200 White=2,373

4.6% 3.1% 1.9% 2.0% 1.0% 2.7% 2.6% 1.7% 1.8% 0.6% 0.9% 0.2%

4.6% 1.4% 0.3% White

Pakistani

Bangladeshi

Black Caribbean

Black African

This analysis encompasses the use of the following types of financial products in the last 3 years: current accounts; overdrafts; term loans; leasing and/or hire-purchase; invoice finance; credit cards; equity finance; and grants.
14

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4.2 Types of financial products used

Attention is now turned to the types of financial products used in the last 3 years. Table A4.2 shows that:

The use of current accounts is very widespread (mid-high 90%s) reflecting their importance for money transmission purposes. Pakistani and Bangladeshi businesses are significantly less likely to hold money on deposit (23.2% and 15.7% of businesses respectively) than Indian (42.4%), Black Caribbeans (39.0%) or White owned businesses (40.4%).

Overdrafts are the most widely used financial product amongst all ethnic groups (50-65%) apart from Black African and White owned businesses (which used them in 42.9% and 52.4% of instances respectively).

Indeed, Black Africans and White owned businesses are significantly less likely to use overdrafts than Indian businesses (65.4%); and Black Africans are also significantly less likely to use overdrafts than Pakistanis (63.5%)

Amongst Black African and White owned businesses the most widely used financial product is credit cards (used in 47.8% and 54.8% of instances respectively).

In this regard, White owned businesses are significantly more likely to use credit cards than Black Caribbeans (40.8%). Indian businesses are significantly more likely to use term loans (39.1%) than Black Africans (19.5%) or White owned businesses (23.7%). Across EMBs about 22% used leasing or hire purchase; a higher percentage of EMBs used term loans (29%). Invoice finance is used by only about 5% of businesses across ethnic groups. Pakistani businesses are significantly more likely to use equity finance than WBs (6.7% versus 2.4%) Black Caribbean businesses are significantly more likely to use grants than Pakistani businesses (12.9% versus 4.5%).

These results present some interesting contrasts with UKSMEF (2004). In particular the results from that survey suggested credit cards were more widely used than overdrafts

94

and that using leasing and hire-purchase was more common than using term loans. It is apparent from the results in Table A4.2 that the previous results were due to the prevalence of WBs in the sample.

It is interesting that Pakistani and Bangladeshi businesses are less likely to use deposit accounts but Pakistani businesses are more likely to use equity finance. Pakistani

businesses are one of the more profitable groups of business so it would seem unlikely that their lower use of deposits was down to lack of funds (see Table A2.6). A lower use of deposit accounts and a preference for equity finance is compatible with religious differences, in particular Sharia (Islamic) law which prohibits the receipt or payment of interest on finance. However, Pakistani and Bangladeshi businesses also make high use of overdrafts and credit cards which suggests that Islamic law is not the only reason behind these differences.

Figure 4.2.1: Use of financial products

70% 65.4% 65% 60% 55% 50% 45.4% 45% 40.8% 40% 35% 30% 25% 20% 15% 10% 5% 0% Indian Pakistani Bangladeshi Black Caribbean Black African White 42.9% Deposit Accounts Overdrafts Term Loans Leasing and Hire Purchase Invoice Finance Credit Cards Equity Finance Grants 54.5% 52.4% 50.8% 48.9% 47.8% 63.5%

57.4% 54.8%

Base: All businesses by ethnic group: Indian=202 Pakistani=202 Bangladeshi=103 Black Caribbean=203 Black African=200 White=2,373

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The preceding analysis highlighted lower use of deposit accounts amongst Pakistani and Bangladeshi businesses, a high use of credit cards across ethnic groups and a concentration of grant use amongst Black Caribbean businesses. In Chapter Three, significant variations in the level of financial problems experienced by different ethnic groups were highlighted. The extent to which financial problems explain patterns of financial product use is examined in the following tables. In particular these tables report the association between self-reported financial problem scores (see Table A3.3) and the probability of using deposit accounts, credit cards and grants (controlling for firm size, location and sector). 15 Other things being equal, it could be expected that financial distress:

Reduces the ability to hold funds on deposit. Increases reliance on credit cards Increases reliance on family & friends finance Increases reliance on overdraft finance Increases reliance on grant aid.

In the following tables statistically significant associations are starred and presented in bold type.

Table 4.2.1 shows that:

Financial problems are strongly associated with a lower probability of holding funds on deposit amongst Black Caribbean businesses. In particular a Black Caribbean business with a financial problem score of 8, denoting a high level of financial problems, is 32.3 percentage points less likely to hold funds on deposit than a Black Caribbean business with no financial problems. Also, Black Caribbean businesses with critical financial problems (score=10) are 25.9 percentage points less likely to hold funds on deposit.

15

These associations were estimated using survey weighted probit estimation.

96

Black African and White owned businesses with financial problems are also significantly less likely to hold deposit accounts. However, the association with financial distress is weaker than for Black Caribbean businesses.

Amongst Asian owned businesses, there is no apparent association between financial distress and the use of deposit accounts. This could indicate that the lower use of deposit accounts by Pakistani and Bangladeshi owned businesses is due to a paucity of Sharia compliant accounts.

Table 4.2.1: Association between self-reported financial problems and the use of deposit accounts (percentage points)
Financial Problem Score 6 7 8 9 10
Base: All businesses by ethnic group: Indian=202 Pakistani=202 Bangladeshi=103 Black Caribbean=203 Black African=200 White=2,373

Indian 2.4 24.1 15.3 32.1

* denotes significance at the 5% level. Gaps in the coefficients arise because in some instances there are too few cases to identify the corresponding effects.

Pakistani 1.4 10.0

Bangladeshi

22.8 4.4 13.3 1.3

Black Caribbean 2.4 16.0 32.3* 25.9*

Black African 23.3 30.6* 5.9 12.1 17.4

White 21.9 28.9* 7.2 18.5 8.4

Table 4.2.2 shows that:

Financial problems are associated with a lower probability of credit card use amongst Pakistani owned businesses. However amongst WBs financial distress (specifically, a problem score of 8) is associated with a 31.7 percentage point increase in the probability of credit card use.

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Table 4.2.2: Association between self-reported financial problems and the use of credit cards (percentage points)
Financial Problem Score 6 7 8 9 10
Base: All businesses by ethnic group: Indian=202 Pakistani=202 Bangladeshi=103 Black Caribbean=203 Black African=200 White=2,373

Indian 9.2 14.6 15.8

Pakistani 28.1 20.3 47.0* 40.4*

Bangladeshi 28.9 1.4 4.9 7.2

Black Caribbean 8.2 1.5 9.0 5.3 7.3

Black African 1.0 9.4 1.0 0.0 1.5

White 4.5 14.7 31.7* 3.9 7.5

* denotes significance at the 5% level. Gaps in the coefficients arise because in some instances there are too few cases to identify the corresponding effects.

Table 4.2.3 shows that:

Financial problems are associated with an increase in the probability of using grants amongst WBs only. Perhaps surprisingly there is no apparent link between financial problems and grant use amongst Black Caribbean businesses (given the high relative use of grants amongst these businesses)

Table 4.2.3: Association between self-reported financial problems and the use of grants (percentage points)
Financial Problem Score 6 7 8 9 10
Base: All businesses by ethnic group: Indian=202 Pakistani=202 Bangladeshi=103 Black Caribbean=203 Black African=200 White=2,373

Indian 0.2 0.5

Pakistani

Bangladeshi

Black Caribbean 0.6 11.5 6.3 7.4 1.2

Black African 0.6 0.9 1.8 2.8

White 2.0 0.6 9.7* 10.4* 1.6

* denotes significance at the 5% level. Gaps in the coefficients arise because in some instances there are too few cases to identify the corresponding effects.

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In summary financial distress is associated with:

A lower use of deposit accounts amongst Black and White owned businesses. An increased use of credit cards amongst WBs only An increased use of grants amongst WBs only.

4.3 Use of friends and family finance

The following table presents analysis of the use of debt and equity supplied by friends and family. On the one hand business owners may prefer finance from these sources because it is cheaper and limits the involvement of external financiers in the business. On the other hand, a business in financial distress may have no other options but to turn to friends and family for assistance. In addition businesses from communities with

traditionally strong family ties may be expected to use friends and family finance more often than other businesses. In this regard it might be anticipated that Asian owned businesses would have a higher incidence of using friends and family finance.

In respect of friends and family finance Table 4.3.1 shows that:

The highest use of friends and family finance is amongst Bangladeshi (47.7%), Pakistani (36.2%) and Black African (35.8%) businesses which is significantly higher than amongst Indian businesses (18.6%).

However WBs are significantly less likely to use friends and family finance (5.5%) than all types of EMBs.

Table 4.3.1: Use of friends and family finance

Percentage Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: All businesses by ethnic group: Indian=202 Pakistani=202 Bangladeshi=103 Black Caribbean=203 Black African=200 White=2,373

Std. Err. 3.1% 3.7% 5.0% 3.3% 3.6% 0.9%

[95% Conf. 13.2% 29.3% 38.0% 21.3% 29.0% 4.0%

Interval] 25.6% 43.7% 57.6% 34.0% 43.1% 7.4%

18.6% 36.2% 47.7% 27.2% 35.8% 5.5%

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The relatively high use of friends and family finance amongst Black African businesses could be an attempt to compensate for the relative paucity of external finance (see Table 4.1.1). In contrast, amongst Pakistani and Bangladeshi businesses, the high usage of friends and family finance appears to be in addition to external finance.

The following analysis looks at the extent to which the use of friends and family finance is associated with financial distress. In particular Table 4.3.2 shows the association between the extent of self-reported financial problems (see Table A3.3) and the likelihood of using friends and family finance (controlling for firm size, sector and location).

Table 4.3.2: shows that (significant associations are starred and in bold type):

Across all ethnic groups financial problems are, to some extent, positively associated with using friends and family finance. For example: amongst Indian businesses a high level of financial distress (specifically, a problem score of 8) is associated with a 41.8 percentage point increase in the likelihood of using friends and family finance relative to an Indian business with no financial problems.

Amongst WBs the same association is 36.4 percentage points. A financial problem score of 7 is associated with a 35.8 percentage point increase in Pakistani owned businesses use of friends and family finance. However the same effect is 54.4 percentage points for Black African businesses. This suggests a stronger association between financial problems and the use of friends and family finance amongst Black African businesses. There is an equally strong association between financial distress and the use of friends and family finance amongst Black Caribbean businesses: businesses from this group with critical financial problems are 54.8 percentage points more likely to use friends and family finance than ones with no financial problems.

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Table 4.3.2: Association between self-reported financial problems and the use of friends and family finance (percentage points)
Financial Problem Score 6 7 8 9 10
Base: All businesses by ethnic group: Indian=202 Pakistani=202 Bangladeshi=103 Black Caribbean=203 Black African=200 White=2,373

Indian 38.9 9.2 41.8*

* denotes significance at the 5% level.

Pakistani 3.3 35.8* 26.2 9.6 -5.5

Bangladeshi 42.5* 30.9 47.3 23.9 35.1

Black Caribbean 32.0 2.7 46.6* 54.8*

Black African 21.1 54.4* 33.6 44.7 27.3

White 0.9 3.9 36.4* 22.0* 2.6

In summary:

Black owned businesses are more likely to use friends and family finance due to financial distress than WBs and other types of EMB. WBs appear less likely to use friends and family finance due to financial problems than EMBs in general.

4.4 Use of business and personal credit cards

Analysis of the use of credit cards for business purposes is presented in this section. In particular, analysis is presented for:

The use of business versus personal credit cards. The purposes for which credit cards are used. Average amounts charged to business and personal credit cards. The incidence of borrowing on business and personal credit cards.

In particular, analysis of the incidence of borrowing on personal credit cards for business purposes provides important evidence of the extent of self-financing (bootstrapping) across ethnic groups.

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The following table on the types of credit card used shows that (amongst credit card users):

Business credit cards are used more widely than personal credit cards across all ethnic groups. Bangladeshi and White owned businesses have the lowest incidence of the use of business credit cards (about 60% of all credit card users in their respective ethnic groups), although not significantly lower than other ethnic groups.

Pakistani and White owned businesses have the lowest incidence of using personal credit cards (45.3% and 49.9% respectively) although once again this is not significantly lower than other ethnic groups.

Table 4.4.1: Use of business and personal credit cards

Percentage BUSINESS CREDIT CARDS Indian Pakistani Bangladeshi Black Caribbean Black African White PERSONAL CREDIT CARDS Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: All businesses which used any credit cards by ethnic group Indian=108 Pakistani=95 Bangladeshi=52 Black Caribbean=84 Black African=100 White=1,451

Std. Err.

[95% Conf.

Interval]

71.7% 69.4% 59.0% 65.7% 72.3% 60.6%

5.0% 5.2% 7.0% 5.4% 4.9% 2.8%

61.0% 58.2% 44.7% 54.3% 61.7% 55.0%

80.5% 78.6% 72.0% 75.6% 80.9% 66.0%

54.3% 45.3% 54.0% 58.7% 57.2% 49.9%

5.5% 5.6% 7.0% 5.6% 5.4% 2.7%

43.5% 34.6% 39.9% 47.3% 46.4% 44.6%

64.8% 56.5% 67.5% 69.2% 67.3% 55.2%

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Analyses of the business purposes for which credit cards are used are presented in Table A4.3 (and summarized in Figure 4.4.1). This analysis indicates that:

Across all ethnic groups business credit cards are used principally for: travel and subsistence; motor expenses; purchasing raw materials; and sundry expenses (although in regard of travel and subsistence and motor expenses Black African businesses are significantly less likely to use business credit cards than WBs).

Business credit cards are used less frequently to buy equipment, vehicles and other fixed capital. Across all ethnic groups, personal credit cards are used principally for: travel and subsistence; motor expenses (with the exception of Bangladeshi businesses); and purchasing raw materials.

Personal credit cards are used less frequently to purchase fixed assets across all ethnic groups. Black African businesses are apparently more likely to buy equipment and vehicles using personal credit cards (21% versus around 9% amongst other ethnic groups) - although this difference is not statistically significant.

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Figure 4.4.1: Purposes for which credit cards are used

60% 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Business credit cards Business credit cards Business credit cards Business credit cards Business credit cards Business credit cards Business credit cards Business credit cards Business credit cards Personal credit cards Personal credit cards Personal credit cards Personal credit cards Personal credit cards Personal credit cards Personal credit cards Personal credit cards Personal credit cards

Travel and subsitence

Motor expenses

Rent and rates

Utility bills

Raw materials Other working Buying Other fixed capital equipment/vehicles assets Black Caribbean Black African White

Sundry expenses

Indian

Pakistani

Bangladeshi

Bases: Business credit card purposes: Indian=81 Pakistani=66 Bangladeshi=31 Black Caribbean=58 Black African=73 White=1,107 Personal credit card purposes: Indian=54 Pakistani=43 Bangladeshi=28 Black Caribbean=46 Black African=53 White=468

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In general it appears that both business and personal credit cards are more likely to be used for working capital rather than fixed capital expenditures. The average monthly amounts of business expenditures on credit cards are reported in the following table:

Monthly business expenditures on business credit cards are broadly similar across ethnic groups (in the region of 1,300 per month). The analysis of business expenditures on personal credit cards suggests that EMBs (with the exception of Black Caribbean businesses) charge more per month to their cards than WBs. However these differences are not statistically significant.

Table 4.4.2: Average monthly expenditures on credit cards

Average amount () BUSINESS CREDIT CARDS Indian Pakistani Bangladeshi Black Caribbean Black African White PERSONAL CREDIT CARDS Indian Pakistani Bangladeshi Black Caribbean Black African White
Bases: Business credit cards: Indian=81 Pakistani=66 Bangladeshi=31 Black Caribbean=58 Black African=73 White=1,107 Personal credit card: Indian=54 Pakistani=43 Bangladeshi=28 Black Caribbean=46 Black African=53 White=468

Std. Err.

[95% Conf.

Interval]

1,733.8 932.2 1,537.9 1,079.6 1,221.0 1,406.2

615.3 187.7 594.0 197.4 233.2 133.9

499.7 552.8 298.8 678.4 750.7 1,143.5

2,967.9 1,311.5 2,777.0 1,480.9 1,691.3 1,669.0

1,754.6 1,397.1 2,936.8 492.6 1,031.0 575.6

789.1 477.0 1,478.0 93.1 290.5 85.0

157.2 419.9 -233.1 301.2 433.9 408.5

3,352.0 2,374.3 6,106.7 683.9 1,628.1 742.7

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The following analysis relates to the issue of whether credit cards are used for borrowing purposes or simply as a convenient method of payment. In this regard businesses were asked whether or not their credit card expenditures were paid off in full on a regular basis. The results in Table 4.4.3 show incidences of credit card expenditures which are not paid off in full on a regular basis. This analysis indicates that:

27.7% of Black African businesses do not pay off business expenses on business credit cards in full on a regular basis. This is significantly higher than amongst Indian (3.5%), Pakistani (5.6%) and White owned businesses (5.3%).

42.8% of Black African businesses do not pay off business expenses on personal credit cards in full on a regular basis. This is significantly higher than amongst WBs (20.9%).

Table 4.4.3: Incidences of credit card expenditures which are not paid off in full on a regular basis
Percentage (%) BUSINESS CREDIT CARDS Indian Pakistani Bangladeshi Black Caribbean Black African White PERSONAL CREDIT CARDS Indian Pakistani Bangladeshi Black Caribbean Black African White
Bases: Business credit cards: Indian=81 Pakistani=66 Bangladeshi=31 Black Caribbean=58 Black African=73 White=1,107 Personal credit card: Indian=54 Pakistani=43 Bangladeshi=28 Black Caribbean=46 Black African=53 White=468

Std. Err.

[95% Conf.

Interval]

3.5% 5.6% 13.5% 8.5% 27.7% 5.3%

2.4% 3.2% 6.4% 3.9% 5.7% 1.3%

0.9% 1.8% 4.9% 3.3% 17.7% 3.3%

13.2% 16.4% 32.3% 20.3% 40.4% 8.6%

21.6% 29.2% 40.7% 38.2% 42.8% 20.9%

6.2% 7.7% 9.6% 7.3% 7.2% 3.9%

11.7% 16.3% 23.3% 24.8% 29.3% 14.3%

36.4% 46.6% 60.7% 53.6% 57.4% 29.6%

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This analysis suggests that Black African businesses are more likely to borrow for business purposes on business credit cards than other ethnic groups. Also Black

African business owners are more likely to self-finance their businesses through borrowing on personal credit cards than other ethnic groups.

4.5 Use of Small Firms Loan Guarantee (SFLG)

All businesses with term loans were asked if they had received assistance under the SFLG. The responses to this question are presented in the following table which shows that:

8% of Bangladeshi businesses have used a SFLG as against only 0.5% of Indian businesses. Black Caribbean (7.8%) and White owned businesses (4.3%) are significantly more likely to use SFLGs than Indian owned businesses.

Bangladeshi and Black Caribbean business owners have the lowest levels of business and personal assets and their businesses are located in the most deprived areas (see Chapter Two). Also Bangladeshi and Black Caribbean businesses are young relative to businesses in other ethnic groups (apart from Black African businesses see Chapter Two). These businesses are therefore the most likely to have insufficient collateral and lack a track record which are the two main conditions for SFLG eligibility.

There are insufficient observations on SFLG use to be able to examine the link with financial distress as in previous sections.

107

Table 4.5.1: Use of SFLG

Percentage Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: All businesses with term loans by ethnic group: Indian=88 Pakistani=73 Bangladeshi=27 Black Caribbean=54 Black African=42 White=902

Std. Err. 0.3% 3.0% 5.5% 3.8% 0.7% 1.3%

[95% Conf. 0.1% 1.7% 1.8% 2.9% 0.2% 2.4%

Interval] 1.9% 15.6% 28.8% 19.6% 4.3% 7.7%

0.5% 5.3% 8.0% 7.8% 1.0% 4.3%

4.6 The demand and supply of new finance

In this section analysis is presented for both the incidence and extent of access to new finance. Specifically this analysis relates to:

The incidences of demand for new finance in the last 3 years. The types of new finance sought and the main sources of start-up finance. The average amount of new finance sought (in absolute terms and as a percentage of asset bases). The average amount of new finance supplied (in absolute terms and as a percentage of asset bases). The extent of finance gaps that is, the difference between the amount of new finance supplied and the amount demanded.

108

4.6.1 Incidences of demand for new finance and the types of new finance sought

Incidence of demand for new finance

Regarding incidences of seeking new finance, Table 4.6.1.1 shows that:

The highest rate of demand for new finance is amongst Black owned businesses (Black Caribbean: 65.0%; Black African: 64.9%). This is significantly higher than the demand amongst WBs (42.8%).

Table 4.6.1.1: Percentage of businesses seeking new finance in the last 3 years
Percentage Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: All businesses by ethnic group: Indian=202 Pakistani=202 Bangladeshi=103 Black Caribbean=203 Black African=200 White=2,373

Std. Err. 4.0% 3.7% 5.0% 3.5% 3.6% 2.0%

[95% Conf. 43.4% 54.2% 47.9% 57.9% 57.6% 39.0%

Interval] 59.2% 68.7% 67.3% 71.5% 71.7% 46.7%

51.3% 61.7% 57.9% 65.0% 64.9% 42.8%

There is a clear divide in the above table between the relatively low rates of demand for new finance amongst Indian businesses and WBs and the relatively higher rates of demand amongst Pakistani, Bangladeshi and Black owned businesses. In Chapter Two it was shown that the latter group of businesses are significantly younger than Indian businesses and WBs. This difference could therefore account for the differences in demand since younger businesses will tend to require some external capital to get up and running whereas established businesses can use retained earnings to fund operations.

109

The following table therefore looks at rates of demand for new finance amongst startups. This table shows:

As expected, higher overall rates of demand for new finance amongst start-ups. However there are no significant differences in start-up rates of demand across ethnic groups (due to the small sample sizes involved in this analysis).

Table 4.6.1.2: Percentage of start-up businesses seeking new finance in the last 3 years
Percentage Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: Start-ups by ethnic group: Indian=8 Pakistani=31 Bangladeshi=34 Black Caribbean=46 Black African=53 White=141

Std. Err. 15.6% 8.2% 8.2% 6.9% 6.6% 6.2%

[95% Conf. 25.2% 55.3% 49.0% 53.7% 55.0% 55.5%

Interval] 98.8% 88.3% 81.4% 81.1% 80.9% 79.7%

84.0% 75.3% 67.2% 69.1% 69.5% 68.9%

Also it would be expected that high growth businesses would have higher capital requirements. Indeed, it was shown in Chapter Two that non-Indian EMBs are faster growing businesses than WBs which again could explain the differences noted in Table 4.6.1.1. Accordingly the following table reports the rates of demand for new finance amongst high growth businesses. This table shows that:

Again as expected, there are higher overall rates of demand for new finance amongst high growth businesses. However, there are no significant differences in high-growth businesses rates of demand across ethnic groups.

110

Table 4.6.1.3: Percentage of high growth businesses seeking new finance in the last 3 years
Percentage Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: High growth businesses by ethnic group Indian=30 Pakistani=41 Bangladeshi=15 Black Caribbean=24 Black African=42 White=215

Std. Err. 10.2% 8.1% 12.2% 10.3% 8.0% 6.1%

[95% Conf. 41.2% 46.8% 41.7% 45.3% 48.2% 48.5%

Interval] 81.0% 78.6% 91.2% 85.9% 79.6% 72.2%

63.3% 64.2% 73.1% 69.2% 65.6% 61.0%

111

Figure 4.6.1.1: Percentage of businesses seeking new finance in the last 3 years
90% 84.0% 80% 75.3% 73.1% 67.2% 70% 63.3% 61.7% 60% 51.3% 50% 42.8% 40% All businesses Start-ups High growth businesses 57.9% 64.2% 69.1% 69.2% 65.0% 69.5% 64.9% 65.6% 61.0% 68.9%

30%

20%

10%

0% Indian Pakistani Bangladeshi Black Caribbean Black African White

Base: All businesses or start-ups or high growth businesses by ethnic group All businesses: Indian=202 Pakistani=202 Bangladeshi=103 Black Caribbean=203 Black African=200 White=2,373 Start-ups: Indian=8 Pakistani=31 Bangladeshi=34 Black Caribbean=46 Black African=53 White=141 High growth businesses: Indian=30 Pakistani=41 Bangladeshi=15 Black Caribbean=24 Black African=42 White=215

112

Sources of new finance

The main types of new finance sought are reported in Table A4.4. indicate that:

These results

66.2% of Black African businesses sought a new overdraft which is significantly higher than amongst Indian owned businesses (30.7%) or amongst WBs (31.9%).

There are no significant differences in rates of demand for new term loans across ethnic groups. 23% of Black Caribbean businesses sought a lease or hire-purchase which is significantly lower than the rate of demand amongst Indian businesses (41.8%). The highest rate of demand for new equity finance is amongst Pakistani businesses (10.8%) although, due to the small samples involved, this is not significantly higher than for other ethnic groups.

This analysis suggests that Black African businesses were seeking funding for short term working capital. On the other hand, Indian owned businesses appear more likely to have sought funds for longer term investments in fixed capital.

113

Figure 4.6.1.2: Types of new finance sought

70% 66.2%

60% 52.5%

57.8% 54.9% 51.6%

50% 44.5% 41.8% 40% 35.1% 32.7% 30.7% 30% 27.7% 27.2% 25.3% 23.0% 20% 31.9% 41.8% 40.6% 39.9% Overdraft Term loan Lease or hire-purchase Invoice finance Equity finance

10.8% 10% 5.5% 4.3% 3.0% 4.4% 2.7% 4.8% 2.9%

9.7% 5.8% 3.9% 1.9%

0% Indian Pakistani Bangladeshi Black Caribbean Black African White

Base: Businesses which sought new finance by ethnic group: Indian=106 Pakistani=128 Bangladeshi=61 Black Caribbean=135 Black African=132 White=1,366

The principal sources of finance used at start-up are reported in Table A4.5. These results show that:

Personal savings are the main source of start-up finance across ethnic groups: the rate of use ranges from 42.7% (Pakistani businesses) to 66.8% (Black African businesses). 16

Only about 1 in every 10 start-ups relied mainly on a bank loan regardless of ethnicity. Both Black and White owned businesses appear to make greater use of subsidized assistance at start-up than Asian owned businesses (amongst which there are no reported instances of using subsidized assistance).

16

This excludes Indian owned businesses for which there are too few businesses to make any comment.

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The high rate of use of personal savings may reflect common difficulties in obtaining external finance without a track record or security. Alternatively it may reflect common preferences for financial independence. Recall from Table A3.1 that a desire for

independence (to be ones own boss) is a very common reason for starting in business.

Figure 4.6.1.3: Main source of start-up finance

Main source of start-up finance (Indian owned businesses)

16%

32%

Personal savings Loan from a bank/building society/finance company Loan from friends/family Invoice finance

18%

34%

115

Main source of start-up finance (Pakistani owned businesses)

4% 7%

7%

Personal savings Mortgage on home

4% 43%

Credit card Loan from a bank/building society/finance company Loan from friends/family Overdraft

14% Other Don't know None 8% 4% 11%

Main source of start-up finance (Bangladeshi owned businesses)

6% 3% 2% Personal savings Mortgage on home 18% Credit card Gift from friends/family 48% Loan from a bank/building society/finance company Loan from friends/family Invoice finance Other 12% Don't know

3% 3% 6%

116

Main source of start-up finance (Black Caribbean owned businesses)

2% 4% 4%

2%

Personal savings Mortgage on home 11% Loan from a bank/building society/finance company Loan from friends/family Grant/subsidized loan from a public authority Other 11% 62% Don't know None 2%

Main source of start-up finance (Black African owned businesses)

2% 6% 6% Personal savings Mortgage on home 8% Credit card Gift from friends/family 2% 4% Loan from a bank/building society/finance company Loan from friends/family Grant/subsidized loan from a public authority 4% Other 67% Don't know

117

Main source of start-up finance (White owned businesses)

6% 6% 1% 4% Mortgage on home Credit card Loan from a bank/building society/finance company Loan from friends/family Grant/subsidized loan from a public authority 1% 4% 66% Other Don't know None Personal savings

11%

Base: Start-ups by ethnic group: Indian=8 Pakistani=31 Bangladeshi=34 Black Caribbean=46 Black African=53 White=141

4.6.2 Amount of new finance sought, amount supplied and finance gaps

Average amount of new finance sought

The following table reports the average amounts of new debt and equity finance sought by businesses in the last 3 years. These amounts are expressed in absolute terms and relative to the businesss asset base. Comparisons of the relative amounts is important since businesses with capital demands which are high relative to their assets bases are more likely to experience financial constraints. This is because finance providers will typically not supply amounts of funding beyond a certain multiple of the businesss assets.

118

These results indicate that:

Indian and Pakistani owned businesses sought in the region of 200,000 worth of new finance. In contrast Bangladeshi and Black owned businesses sought only about 60,000 worth of new finance. WBs sought around 100,000 worth of new finance. However there is substantial variation in the amounts sought within ethnic groups with the result that these apparent differences are not statistically significant. Indian, Pakistani and Black Caribbean owned businesses sought the largest amount of new finance per 1 of total assets (between 1.10 and 1.30 per 1 of total assets) suggesting these businesses may be more likely to experience financial constraints.

WBs sought the lowest amount of finance as a multiple of assets (0.70 per 1); this is not, however, significantly smaller compared to other ethnic groups.

Table 4.6.2.1: Average amount of new finance sought in the last 3 years
Average amount () Indian Pakistani Bangladeshi Black Caribbean Black African White 216,120.0 189,402.4 59,046.2 56,255.0 58,326.0 106,855.6 Multiple of asset base Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: Businesses which sought new finance by ethnic group: Indian=106 Pakistani=128 Bangladeshi=61 Black Caribbean=135 Black African=132 White=1,366

Std. Err. 79,599.2 83,818.1 22,021.9 18,717.7 24,489.6 16,655.2

[95% Conf. 57,828.3 23,224.9 14,791.6 19,168.3 9,772.9 74,177.9

Interval] 374,411.7 355,579.9 103,300.9 93,341.8 106,879.0 139,533.3

1.1 1.3 0.9 1.1 0.9 0.7

0.3 0.3 0.2 0.2 0.1 0.1

0.5 0.6 0.5 0.7 0.7 0.6

1.6 2.0 1.3 1.5 1.2 0.9

119

Figure 4.6.2.1: Average amount of new finance sought in the last 3 years
250,000 1.4

216,120

1.3 1.2

200,000

1.1

189,402 1.1 1 0.9

150,000

0.9 0.8 0.7 106,856 0.6 Amount () Multiple of asset base

100,000

0.4 59,046 50,000 0.2 56,255 58,326

0 Indian Pakistani Bangladeshi Black Caribbean Black African White

Base: Businesses which sought new finance by ethnic group: Indian=106 Pakistani=128 Bangladeshi=61 Black Caribbean=135 Black African=132 White=1,366

The following results for start-ups suggest that:

Start-ups sought smaller amounts compared with the averages for all businesses reported previously. However start-up capital demands relative to asset bases are larger than those previously reported (except for WBs).

These findings are to be expected since start-ups are smaller than established businesses implying their absolute capital requirements are smaller. However new

businesses will have relatively larger demands for external capital since, unlike established businesses, they do not have retained earnings with which to finance the business. Since start-up capital demands are a higher multiple of assets than amongst

120

established firms this would suggest that start-ups are more likely to experience financial constraints than established firms. This would seem to be especially the case for

Pakistani owned start-ups which have capital demands that are twice their asset bases.

Table 4.6.2.2: Average amount of new finance sought by start-ups

Average amount () Indian Pakistani Bangladeshi Black Caribbean Black African White 189,953.3 47,106.0 23,9132.7 9,663.2 48,953.1 40,883.8 Multiple of asset base Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: Start-ups by ethnic group: Indian=8 Pakistani=31 Bangladeshi=34 Black Caribbean=46 Black African=53 White=141

Std. Err. 112,751.3 17,309.6 6,363.3 4,020.3 20,846.7 7,946.2

[95% Conf. -123,094.6 10,411.3 10,423.2 1,365.7 6,018.6 25,095.0

Interval] 503,001.2 83,800.8 37,402.0 17,960.7 91,887.7 56,672.7

1.2 2.0 1.2 0.8 1.0 0.7

0.3 0.8 0.4 0.3 0.2 0.1

0.2 0.2 0.5 0.3 0.5 0.5

2.3 3.9 2.0 1.4 1.5 1.0

121

Figure 4.6.2.2: Average amount of new finance sought by start-ups

200,000 189,953 180,000 2.5

160,000

140,000

120,000

1.5 Amount () Multiple of asset base 1 0.8 47,106 48,953 0.7 40,884 0.5 23,913 1

100,000

1.2

1.2

80,000

60,000

40,000

20,000 9,663 0 Indian Pakistani Bangladeshi Black Caribbean Black Af rican White 0

Base: Start-ups by ethnic group: Indian=8 Pakistani=31 Bangladeshi=34 Black Caribbean=46 Black African=53 White=141

The following table shows the amounts of new finance sought by high growth businesses. There is considerable imprecision in these estimates due to the small

sample sizes. However, the results in this table suggest that:

As a multiple of assets bases, high growth businesses (with the exception of Black Caribbean businesses) tend to seek above average amounts of new finance (compare with Table 4.6.2.1) although these differences are not statistically significant.

Both Indian and White owned high growth businesses sought significantly greater amounts (94,689 and 192,069 respectively) than high growth Black Caribbean businesses (8,691).

Capital demands as a multiple of business assets tend to be higher than average amongst high growth firms.

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As with start-ups this last result suggests that high growth firms will have a higher than average likelihood of experiencing financial constraints.

Table 4.6.2.3: Average amount of new finance sought by high growth businesses in the last 3 years
Average amount () Indian Pakistani Bangladeshi Black Caribbean Black African White 94,688.2 177,668.4 61,221.3 8,691.0 19,829.1 192,068.7 % of Asset Base Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: High growth businesses (turnover growth rate of 30% or more) by ethnic group: Indian=30 Pakistani=41 Bangladeshi=15 Black Caribbean=24 Black African=42 White=215

Std. Err. 36,462.0 60,408.2 29,041.0 2,157.5 4,611.8 85,593.8

[95% Conf. 17,392.1 52,389.5 -5,747.5 4,030.1 10,313.9 22,641.0

Interval] 171,984.3 302,947.4 128,190.0 13,352.0 29,345.3 361,496.4

1.3 1.4 1.3 0.5 1.1 1.6

0.5 0.9 0.7 0.2 0.4 0.7

0.2 -0.5 -0.4 0.0 0.4 0.1

2.5 3.3 3.0 1.0 1.9 3.1

123

Figure 4.6.2.3: Average amount of new finance sought by high growth businesses in the last 3 years
250,000 1.8

1.6 200,000 1.3 1.4 177,668 1.3

1.6

192,069

1.4

1.2 1.1 150,000 1.0 Amount () Multiple of asset base 0.8 100,000 94,688 0.6 61,221 50,000 0.5 0.4

19,829 8,691 0 Indian Pakistani Bangladeshi Black Caribbean Black African White

0.2

0.0

Base: High growth businesses (turnover growth rate of 30% or more) by ethnic group: Indian=30 Pakistani=41 Bangladeshi=15 Black Caribbean=24 Black African=42 White=215

Average amount of new finance supplied

Analysis of the average amounts of new finance obtained by businesses is reported in the following tables. Comparing supply with capital demands reported in Table 4.6.2.1 suggests that businesses tend to obtain less finance than the amount that was sought. Also, the amounts of finance supplied, as a multiple of asset bases, are all less than unity. This suggests that finance providers may be reluctant to supply finance unless the amount is covered by business assets.

124

Table 4.6.2.4: Average amount of new finance supplied in the last 3 years
Average amount () Indian Pakistani Bangladeshi Black Caribbean Black African White 211,208.9 175,884.6 55,075.9 51,586.8 20,466.8 100,020.9 Multiple of asset base Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: Businesses which sought new finance by ethnic group: Indian=106 Pakistani=128 Bangladeshi=61 Black Caribbean=135 Black African=132 White=1,366

Std. Err. 79,689.1 83,763.2 22,068.0 18,741.5 5,935.7 16,402.0

[95% Conf. 52,738.3 9,816.0 10,728.5 14,452.9 8,698.6 67,840.0

Interval] 369,679.4 341,953.3 99,423.3 88,720.7 32,234.9 132,201.8

1.0 1.0 0.7 0.7 0.5 0.6

0.3 0.3 0.2 0.2 0.1 0.1

0.4 0.4 0.4 0.4 0.3 0.5

1.6 1.6 1.1 1.0 0.7 0.8

125

Figure 4.6.2.4: Average amount of new finance supplied in the last 3 years
250,000 1.2

211,209 1.0 1.0 200,000 175,885 0.8 150,000 0.7 0.7 0.6 0.6 100,021 100,000 0.5 0.4 Amount () Multiple of asset base 1.0

55,076 50,000

51,587 0.2 20,467

0 Indian Pakistani Bangladeshi Black Caribbean Black African White

0.0

Base: Businesses which sought new finance by ethnic group: Indian=106 Pakistani=128 Bangladeshi=61 Black Caribbean=135 Black African=132 White=1,366

126

Table 4.6.2.5: Average amount of new finance supplied to start-ups

Average amount () Indian Pakistani Bangladeshi Black Caribbean Black African White 186,885.7 44,247.5 20,431.3 3,020.2 30,237.0 38,334.2 Multiple of asset Base Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: Start-ups by ethnic group: Indian=8 Pakistani=31 Bangladeshi=34 Black Caribbean=46 Black African=53 White=141

Std. Err. 110,026.2 17,635.9 6,438.9 838.4 18,351.9 7,909.6

[95% Conf. -118,596.0 6,861.1 6,781.5 1,289.8 -7,559.4 22,620.4

Interval] 492,367.3 81,634.0 34,081.1 4,750.6 68,033.3 54,047.9

1.2 1.8 0.9 0.5 0.5 0.7

0.3 0.9 0.3 0.2 0.2 0.1

0.2 -0.1 0.3 0.0 0.0 0.4

2.3 3.7 1.6 1.0 0.9 1.0

127

Figure 4.6.2.5: Average amount of new finance supplied to start-ups

200,000 186,886 180,000 1.8 1.8 2

160,000

1.6

140,000

1.4

120,000

1.2

1.2 Amount () Multiple of asset base

100,000 0.9 80,000 0.7 60,000 44,248 40,000 30,237 20,431 20,000 3,020 0 Indian Pakistani Bangladeshi Black Caribbean Black African White 0.5 0.5 38,334

0.8

0.6

0.4

0.2

Base: Start-ups by ethnic group: Indian=8 Pakistani=31 Bangladeshi=34 Black Caribbean=46 Black African=53 White=141

128

Table 4.6.2.6: Average amount of new finance supplied to high growth businesses in the last 3 years
Average amount () Indian Pakistani Bangladeshi Black Caribbean Black African White 90,783.5 156,371.1 59,976.5 8,554.7 14,044.1 182,493.1 Multiple of asset base Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: High growth businesses (turnover growth rate of 30% or more) by ethnic group: Indian=30 Pakistani=41 Bangladeshi=15 Black Caribbean=24 Black African=42 White=215

Std. Err. 35,513.9 59,016.5 29,387.9 2,171.8 4,214.1 85,621.9

[95% Conf. 15,497.3 33,978.5 -7,792.1 3,862.7 5,346.5 13,009.7

Interval] 166,069.6 278,763.8 127,745.0 13,246.6 22,741.6 351,976.4

1.3 1.3 1.3 0.5 0.7 0.5

0.5 0.9 0.8 0.2 0.3 0.1

0.2 -0.6 -0.5 0.0 0.2 0.3

2.5 3.2 3.0 1.0 1.3 0.6

129

Figure 4.6.2.6: Average amount of new finance supplied to high growth businesses in the last 3 years
200,000 1.3 180,000 1.3 1.3 1.2 160,000 156,371 182,493 1.4

140,000

1.0

120,000 0.8 0.7 100,000 90,783 0.6 80,000 59,976 60,000 0.5 0.5 0.4 Amount () Multiple of asset base

40,000 0.2 20,000 8,555 0 Indian Pakistani Bangladeshi Black Caribbean Black African White 0.0 14,044

Base: High growth businesses (turnover growth rate of 30% or more) by ethnic group: Indian=30 Pakistani=41 Bangladeshi=15 Black Caribbean=24 Black African=42 White=215

Finance gaps

The aim of the analysis in this section is to quantify the gap between the amounts of new finance sought (demand) and the amounts supplied which were analyzed in the two previous sections. quantified. This measure allows the extent of financial constraints to be

130

The following table indicates:

There are significant finance gaps (i.e., significantly greater than zero), in absolute terms, amongst all ethnic groups apart from Indian owned businesses. The highest finance gaps are amongst Black African (14,102) and Pakistani owned businesses (13,518). WBs have lower finance gaps (5,435) if not the lowest (Bangladeshi: 3,970). However there are no significant differences in the absolute sizes of the finance gaps across ethnic groups. On the other hand, looking at finance gaps relative to asset bases, Black owned businesses experienced significantly higher finance gaps (0.4-0.6) than Indian owned businesses (<0.0).

The implication from this analysis is that Black owned businesses experience larger funding shortfalls than Indian owned businesses with the same level of assets. This suggests that differences in access to finance between Black owned and Indian businesses are not due to differences in the amount of business assets which could be used as security on loans. However, it will be recalled from Chapter Two that owner managers of Black owned businesses have significantly fewer personal assets than Indian owner managers. Due to the intermingling of personal and business assets in small businesses a relative absence of security could therefore still be a factor in explaining differences in access to finance across these ethnic groups.

131

Table 4.6.2.7: Average finance gaps

Average amount () Indian Pakistani Bangladeshi Black Caribbean Black African White 4,911.2 13,517.8 3,970.3 4,668.2 14,101.9 5,435.1 Multiple of asset base Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: Businesses which sought new finance by ethnic group: Indian=106 Pakistani=128 Bangladeshi=61 Black Caribbean=135 Black African=132 White=1,366

Std. Err. 2,667.0 4,635.3 1,656.5 1,235.9 3,992.7 1,224.0

[95% Conf. -392.4 4,327.8 641.5 2,219.4 6,185.1 3,033.6

Interval] 10,214.7 22,707.8 7,299.2 7,117.1 22,018.6 7,836.6

<0.0 0.3 0.1 0.4 0.6 0.3

<0.0 0.1 0.1 0.1 0.2 0.1

<0.0 <0.0 <0.0 0.2 0.2 <0.0

0.1 0.5 0.3 0.7 1.0 0.5

132

Figure 4.6.2.7: Average finance gaps

16,000 0.70

14,102 14,000 13,518 0.62 12,000 0.50 0.60

10,000 0.41 0.40 Amount () Multiple of asset base 0.30 6,000 4,911 3,970 4,000 0.14 2,000 0.03 0 Indian Pakistani Bangladeshi Black Caribbean Black African White 0.00 0.10 0.27 4,668 0.20 0.28 5,435

8,000

Base: Businesses which sought new finance by ethnic group: Indian=106 Pakistani=128 Bangladeshi=61 Black Caribbean=135 Black African=132 White=1,366

In general there is wide variation in the results for finance gaps amongst start-ups due to the small samples involved. Subject to this caveat:

There are significant absolute finance gaps amongst Bangladeshi and White owned start-ups (i.e., the confidence intervals do not cross zero). Regarding finance gaps relative to asset bases the gap amongst Black African businesses (0.4) is significantly higher than the gap amongst WBs (0.1). This suggests that a Black African start-up with the same amount of business assets (to use as security) as a White owned start-up will face a larger shortfall in funding.

133

Table 4.6.2.8: Average finance gaps (start-ups)

Average amount () Indian Pakistani Bangladeshi Black Caribbean Black African White 2,347.5 2,858.5 3,481.3 6,643.0 18,716.2 2,501.2 % of Asset Base Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: Start-ups by ethnic group: Indian=8 Pakistani=31 Bangladeshi=34 Black Caribbean=46 Black African=53 White=141

Std. Err. 2,231.1 1,482.1 1,425.9 4,097.1 11,989.8 1,026.3

[95% Conf. -3,387.9 -283.4 458.5 -1,812.9 -5,977.2 462.0

Interval] 8,082.8 6,000.3 6,504.2 15,099.0 43,409.5 4,540.4

<0.0 0.2 0.3 0.4 0.4 0.1

<0.0 0.2 0.2 0.2 0.1 <0.0

<0.0 -0.1 -0.1 <0.0 0.2 <0.0

<0.0 0.6 0.7 0.7 0.7 0.1

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Figure 4.6.2.8: Average finance gaps (start-ups)

20,000 18,716 18,000 0.44 0.45 0.50

16,000

0.40

14,000 0.31 12,000

0.35

0.35

0.30 Amount () Multiple of asset base

10,000 0.21 8,000 6,643 6,000

0.25

0.20

0.15

4,000 2,858 2,347 2,000

3,481 2,501 0.05

0.10

0.05

0.01 Indian Pakistani Bangladeshi Black Caribbean Black African White

0.00

Base: Start-ups by ethnic group: Indian=8 Pakistani=31 Bangladeshi=34 Black Caribbean=46 Black African=53 White=141

Subject to a small sample proviso:

Black African and White owned high growth businesses have significant absolute finance gaps (5,785 and 9,576 respectively). The relative finance gap amongst Black African businesses (0.4) is significantly higher than amongst Indian (<0.0), Black Caribbean (<0.0) and White owned (<0.0) high growth businesses.

This suggests that Black African high growth businesses experience larger funding shortfalls than businesses from these other ethnic groups with the same level of business assets.

Again, this last result suggests that differences in business assets do not explain the relatively larger funding shortfalls amongst Black African businesses.

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Table 4.6.2.9: Average finance gaps (high growth businesses)

Average amount () Indian Pakistani Bangladeshi Black Caribbean Black African White 3,904.7 20,299.5 1,244.8 136.4 5,785.1 9,575.6 Multiple of asset base Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: High growth businesses (turnover growth rate of 30% or more) by ethnic group: Indian=30 Pakistani=41 Bangladeshi=15 Black Caribbean=24 Black African=42 White=215

Std. Err. 3,592.9 14,319.6 1,230.0 91.3 1,587.4 4,679.7

[95% Conf. -3,711.8 -9,322.8 -1,591.5 -60.8 2,508.9 312.4

Interval] 11,521.2 49,921.7 4,081.1 333.6 9,061.3 18,838.8

<0.0 0.1 <0.0 <0.0 0.4 <0.0

<0.0 0.1 <0.0 <0.0 0.1 <0.0

<0.0 <0.0 -0.1 <0.0 0.1 <0.0

<0.0 0.3 0.1 <0.0 0.7 0.1

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Figure 4.6.2.9: Average finance gaps (high growth businesses)

25,000 0.45

0.39 20,299 20,000

0.40

0.35

0.30 15,000 0.25 Amount () Multiple of asset base 0.20 10,000 9,576 0.15 0.13 5,785 5,000 0.10 3,905 0.05 0.04 136 0.01 Pakistani Bangladeshi Black Caribbean Black African White 0.00

0.04 1,245 0.02 0 Indian

Base: High growth businesses (turnover growth rate of 30% or more) by ethnic group: Indian=30 Pakistani=41 Bangladeshi=15 Black Caribbean=24 Black African=42 White=215

4.7 Financial rejections and discouragement

The analysis in this section relates to businesses which sought new finance (debt and/or equity) and were turned down by a finance provider or felt discouraged from applying because they believed they would be turned down. Rejection and discouragement rates are measured as a percentage of those businesses which needed new finance (i.e., those which sought new finance or felt discouraged from doing so).

The following table reports incidences of businesses which were:

Turned down outright. Offered less than they wanted.

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Felt discouraged from applying.

These categories are not mutually exclusive because they relate to more than one type of finance. For example it is possible for a business to fall into the rejection category for one type of finance, the partial rejection category in another and the discouraged category for yet another (or the converse). Accordingly, it is possible for the

percentages reported in the following table to sum to more than 100% across the categories.

Table 4.7.1 shows that:

Black African owned businesses have a 37.4% likelihood of outright rejection. This is significantly higher compared to Indian (5.8%), Pakistani (13.2%) and White owned businesses (10.4%).

Black Caribbean owned businesses have a 28.1% likelihood of outright rejection. Again this is significantly higher compared to Indian, Pakistani and White owned businesses.

Partial rejection rates vary between 18% (Bangladeshi businesses) and 30.2% (Black African businesses). However there are no significant differences in partial rejection rates across ethnic groups. Black African businesses are the most likely to feel discouraged from applying for finance 45.9% of businesses in this group which needed new finance felt discouraged.

The corresponding figure for Black Caribbean businesses is 40.6%. Both groups of Black owned businesses are significantly more likely to feel discouraged from applying for finance than Indian (11.6%), Pakistani (22.9%) and White owned (7.1%) businesses.

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Table 4.7.1: Outright rejection, partial rejection and discouragement

Percentage Outright rejection Indian Pakistani Bangladeshi Black Caribbean Black African White Partial rejection Indian Pakistani Bangladeshi Black Caribbean Black African White Felt discouraged from applying Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: Businesses which sought new finance or were discouraged from applying for new finance by ethnic group: Indian=109 Pakistani=139 Bangladeshi=68 Black Caribbean=152 Black African=153 White=1,385

Std. Err.

[95% Conf.

Interval]

5.8% 13.2% 21.8% 28.1% 37.4% 10.4%

2.5% 3.2% 5.2% 3.8% 4.2% 2.3%

2.4% 8.2% 13.2% 21.3% 29.6% 6.7%

13.3% 20.8% 33.8% 36.2% 46.0% 15.7%

23.6% 25.0% 18.0% 24.7% 30.2% 19.3%

4.7% 4.0% 4.8% 3.6% 4.0% 2.5%

15.5% 18.0% 10.3% 18.2% 23.0% 14.9%

34.2% 33.7% 29.5% 32.5% 38.5% 24.5%

11.6% 22.9% 32.7% 40.6% 45.9% 7.1%

3.6% 3.9% 5.9% 4.2% 4.3% 1.6%

6.2% 16.1% 22.3% 32.8% 37.6% 4.5%

20.9% 31.5% 45.3% 49.0% 54.5% 10.9%

139

Figure 4.7.1: Outright rejection, partial rejection and discouragement

50% 45.9% 45% 40.6% 40% 37.4% 35%

32.7% 30.2%

30% 25.0% 25% 23.6% 22.9% 21.8%

28.1% 24.7% Outright rejection Partial rejection Felt discouraged from applying 19.3% 18.0%

20%

15% 11.6%

13.2% 10.4%

10% 7.1% 5.8% 5%

0% Indian Pakistani Bangladeshi Black Caribbean Black Af rican White

Base: Businesses which sought new finance or were discouraged from applying for new finance by ethnic group: Indian=109 Pakistani=139 Bangladeshi=68 Black Caribbean=152 Black African=153 White=1,385

These results suggest that the incidence of financial constraints is higher amongst Black owned businesses. These results complement the earlier finding that finance gaps (i.e., the extent of financial constraints) are disproportionately larger amongst Black African businesses. The results also suggest there is a high correlation between the perception of rejection (i.e., discouragement) and the reality of rejection. In other words, ethnic groups with high (low) rates of discouragement also have high (low) actual rejection rates.

Businesses views as to the reasons they were denied loans are reported in Table A4.6. Looking at these reasons it can be seen that:

140

Insufficient security is the most cited reason amongst Indian owned businesses. This finding is in accordance with the high capital demands reported previously for Indian owned businesses (more than 200,000: see Table 4.6.2.1)

No reason is cited most frequently amongst Pakistani, Black African and White owned businesses which could be indicative of poor communications between lenders and SMEs.

No credit history is the most frequently reported reason amongst Bangladeshi businesses. This finding is in accordance with the relatively high proportion of start-ups amongst Bangladeshi owned businesses (34%: see Chapter Two)

Other reasons are cited most commonly amongst Black Caribbean businesses.

Figure 4.7.2: Reasons for loan rejections (overdrafts and term loans)
35% 33% 32% 29% 30%

26% 25% 25%

26%

19% 20% 18% 17% 14% 15% 14% 14% 13% 13% 11% 11% 10% 8% 8% 9% 9% 7% 5% 5% 3% 4% 14% 12% 11% 11% 10% 8% 8% 11% 11% 9% 8% 7% 7% 7% 6% 16%

Insufficient security Poor business credit history Poor personal credit history No credit history No reason Other reasons Dont know reason

0% Indian Pakistani Bangladeshi Black Caribbean Black African White

Base: Businesses with overdraft and/or term loan rejections by ethnic group: Indian=21 Pakistani=29 Bangladeshi=19 Black Caribbean=59 Black African=75 White=206

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4.8 Self-reported consequences of financial rejection

To conclude this chapter, the self-reported consequences of term loan rejections are examined. At best, these results can give only a qualitative indication of differences in the consequences of financial rejection because the samples involved are very small.

Subject to this caveat, the qualitative indications from Table 4.8.1 are that following rejection:

Most businesses were able to obtain funding from elsewhere with the exception of Black African businesses. Most businesses tended not to get into serious financial difficulties with the exception of Bangladeshi and Black African businesses. Bangladeshi and Black owned businesses are the most likely to have dropped their plans as a consequence of rejection.

Despite the severe limitations of the sample sizes, these findings appear to corroborate the evidence in Chapter Three regarding the relatively high levels of self-reported financial problems amongst Bangladeshi and Black African businesses.

Table 4.8.1: Self-reported consequences of term loan rejections

Consequence Not much got funding from elsewhere Had to use internal finance Deferred plans but eventually went ahead with them Plans had to be dropped The business got into serious financial difficulties Increased financial pressure Other
Base: Businesses which experienced a term loan rejection by ethnic group Indian=7 Pakistani=7 Bangladeshi=4 Black Caribbean=12 Black African=19 White=50

Indian 43.0% 19.0% 19.0% 19.0%

Pakistani 81.8% 1.9%

Bangladeshi 50.0% 50.0%

Black Caribbean 41.7% 8.3% 8.3% 33.3% 8.3%

Black African 6.7% 17.3% 23.1% 29.8% 23.1% 5.8%

White 59.1% 3.1% 29.5% 4.6% 2.9% 6.7% 5.1%

18.2% 1.9%

25.0% 25.0%

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Summary

The highest rate of demand for new finance is amongst Black owned businesses with about two in every three of these businesses seeking new finance. WBs have the lowest rate of demand with about two in every five of these businesses seeking new finance. These differences can be explained by the younger ages of Black owned businesses.

However, Black owned businesses face a shortfall in finance which is significantly higher than the shortfall amongst Indian owned businesses with the same level of assets. This shortfall is between 40 and 60 pence per 1 of business assets (for Black Caribbean and Black African owned businesses respectively). In addition, Black owned businesses are significantly more likely to experience outright rejection or to feel discouraged from applying for finance than Indian, Pakistani and White owned businesses.

This objective analysis of finances supports the analysis of self-reported financial problems (Chapter Three) which indicated that Black owned businesses (and to a lesser extent Bangladeshi businesses) had significantly greater problems than WBs. Whereas it is reasonable to conclude from this analysis that Black owned businesses face higher financial constraints than some other businesses, it is not reasonable to conclude that these constraints are a result of discrimination on ethnic grounds by finance providers. The apparent discrimination could be due to greater risk in lending to Black owned businesses relative to other businesses (due for example to their younger ages). Finance providers may therefore choose to reduce lending disproportionately to Black owned businesses in order to limit their exposure to risk (to emphasize, not on grounds of ethnicity but due, for example, to their relative youth). In view of this possibility, a multivariate analysis of the roles of different risk factors in explaining variations in access to finance across EMBs is conducted in Chapter Six.

Before this analysis, however, it is important to look at financial relationships. Finance providers require information on borrowers in order to assess their credit worthiness. This information can be obtained over the course of a relationship between the business and finance provider. It would therefore be anticipated that financial relationships play an important role in explaining variations in access to finance across ethnic groups.

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Chapter Four: summary of key significant findings Use of financial products: Pakistani and Bangladeshi businesses are less likely to hold money on deposit (23.2% and 15.7% of businesses respectively) than Indian (42.4%), Black Caribbeans (39.0%) or WBs (40.4%). Black Africans and WBs are less likely to use overdrafts than Indian businesses (65.4%); and Black Africans are also significantly less likely to use overdrafts than Pakistanis (63.5%). WBs are more likely to use credit cards than Black Caribbeans (40.8%). Indian businesses are more likely to use term loans (39.1%) than Black Africans (19.5%) or WBs (23.7%). Pakistani businesses are more likely to use equity finance than WBs (6.7% versus 2.4%) Black Caribbean businesses are more likely to use grants than Pakistani businesses (12.9% versus 4.5%). Friends and family finance: WBs are significantly less likely to use friends and family finance (5.5%) than all types of EMBs. Financial distress is associated with using friends and family finance amongst all ethnic groups. Credit cards: 27.7% of Black African businesses do not pay off business expenses on business credit cards in full on a regular basis. This is significantly higher than amongst Indian (3.5%), Pakistani (5.6%) and WBs (5.3%). 42.8% of Black African businesses do not pay off business expenses on personal credit cards in full on a regular basis. This is significantly higher than amongst WBs (20.9%). SFLG: Black Caribbean (7.8%) and WBs (4.3%) are significantly more likely to use SFLGs than Indian owned businesses (0.5%). Demand for new finance: The highest rate of demand for new finance is amongst Black owned businesses (Black Caribbean: 65.0%; Black African: 64.9%). This is significantly higher than the demand amongst WBs (42.8%). 66.2% of Black African businesses sought a new overdraft which is significantly higher than amongst Indian owned businesses (30.7%) or amongst WBs (31.9%). 23% of Black Caribbean businesses sought a lease or hire-purchase which is significantly lower than the rate of demand amongst Indian businesses (41.8%). Finance gaps: Black owned businesses experienced significantly higher finance gaps relative to their asset base (0.4-0.6) than Indian owned businesses (<0.0). Amongst Black African start-ups the average relative finance gap (0.4) is significantly higher than the gap amongst WBs (0.1). Amongst Black African high growth businesses the average relative finance gap (0.4) is significantly higher than amongst Indian (<0.0), Black Caribbean (<0.0) and White owned (<0.0) high growth businesses. Rejection and discouragement: Black African businesses have a 37.4% likelihood of outright rejection. This is significantly higher compared to Indian (5.8%), Pakistani (13.2%) and White owned businesses (10.4%). Black Caribbean businesses have a 28.1% likelihood of outright rejection. Again this is significantly higher compared to Indian, Pakistani and White owned businesses. 45.9% of Black African businesses and 40.6% of Black Caribbean businesses needing new finance felt discouraged from applying for finance. This is higher than amongst Indian (11.6%), Pakistani (22.9%) and White owned (7.1%) businesses.

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5. Financial relationships
The success or failure of a business can be a highly uncertain event. If finance providers are unable to ascertain the likelihood of success they may choose not to supply finance rather than lose money on an uncertain investment proposition. Financial relationships are therefore an important determinant of access to finance since they help finance providers to ascertain whether or not an investment proposition is viable. These relationships involve the flow of soft information, such as the acumen and commitment of the business owner, from the business to the finance provider. In the case of small businesses, soft information may be more relevant than so-called hard information drawn from the firms accounts since this information may be sparse or non-existent.

The key dimensions of financial relationships are their length and exclusivity. Longer and exclusive relationships increase the amount of information available to finance providers on which to base their risk assessments. Indeed Fraser (2005) showed that longer relationships with a single finance provider significantly improve access to finance (although the same study indicated that switching providers per se does not appear to worsen access to finance). In this chapter analysis is therefore presented for:

The main providers of finance (market shares). The number of finance providers used. The length of financial relationships

The absence of effective competition in the provision of SME banking services has lead to the introduction of public policy measures to reduce bank charges and promote switching amongst SME customers. In this regard, Fraser (2005) highlighted the

dominant market power of the main banks involved in SME banking. Whilst, from the banks perspective, EMBs do not form a separate market from mainstream businesses particular ethnic groups may nonetheless have common banking needs which differ from the mainstream. Therefore, minority groups may be at a particular disadvantage in

145

having their specific needs met as a result of weak market power. 17 Language and other cultural barriers may add to this disadvantage by hindering communications. In this context analysis of the following issues is also presented:

The satisfaction of businesses with their main finance provider in terms of o o The service provided. Banking charges.

Tendencies to switch finance providers.

The chapter concludes by looking at:

Instances of failure to keep up with loan repayments. Instance of unauthorized borrowing on an overdraft. The cost of borrowing.

Financial delinquency (i.e., failure to keep up with loan repayments or unauthorized borrowing on an overdraft) is an important factor for finance providers in assessing risk this behaviour is likely to increase the cost of borrowing in the future or result in the denial of new finance.

5.1 Market shares of the main providers of finance

Table A5.1 (see Appendix A) reports the market shares of the main providers of finance. Individual banks cannot be named for WBs because these data are subject to an anonymity agreement with the sponsors of UKSMEF (2004). This analysis shows that:

For example, it is only in recent years that Sharia compliant financial products have become available in the UK as a result of the growing market power of Islamic communities. The market for Islamic mortgages in the UK is currently worth 164m and is set to grow to 1.4bn by 2009 - banks are understandably keen to gain a share of this market. The United Bank of Kuwait offered the first Sharia compliant mortgage in the UK in July 2002. HSBC was the first High Street bank to introduce Sharia compliant products (July 2003) followed by Lloyds TSB. Other High Street banks are likely to follow given the growth in the market.
17

146

The Big Four 18 banks account for: o o o o o o 84.3% of the market for Indian owned business accounts. 86.7% of the market for Pakistani owned business accounts. 94.9% of the market for Bangladeshi owned business accounts. 88.8% of the market for Black Caribbean owned business accounts. 84.2% of the market for Black African owned business accounts. 76.9% of the market for White owned business accounts.

Ethnic banks such as the Habib Bank and the Bank of India account for relatively small shares of the market. However, amongst Pakistani owned businesses, Habib Bank has the largest market share (3.5%) outside of the Big Four banks.

The general indication from this table is that EMB accounts are even more concentrated in the Big Four banks than is the case for WBs. The issue of high banking charges identified in previous reports, particularly in relation to the Big Four (Cruickshank, 2000; Competition Commission, 2002), could therefore be exacerbated amongst EMBs. Analysis later in this chapter will seek to examine evidence on whether this difference in concentration has an adverse effect on levels of charges, and indeed service, amongst EMBs.

18

Royal Bank of Scotland Group (Natwest), Lloyds TSB, Barclays and HSBC.

147

Figure 5.1.1: Market shares of main providers of finance (EMBs only)

Market shares (Indian owned businesses)

1% 10%

2% 28% 2%

Natwest Royal Bank of Scotland 13% Barclays HSBC Lloyds TSB Alliance and Leicester Bank of Scotland 2% Other Don't know

14%

27%

Market shares (Pakistani owned businesses)

2% 2% 3%

3%

2%

28%

Barclays Natwest 15% Royal Bank of Scotland HSBC Lloyds TSB Habib Bank Bank of Scotland Yorkshire Bank Other Don't know

18% 24% 1%

148

Market shares (Bangladeshi owned businesses)

2% 2% 1% 12%

32%

Barclays Natwest HSBC Lloyds TSB Bank of Scotland 23% Nationwide Don't know

29%

Market shares (Black Caribbean owned businesses)

2% 2%

2% 2%1%

2%

28%

Lloyds TSB Natwest 18% Royal Bank of Scotland Barclays HSBC Bank of Scotland The Halifax Abbey National Nationwide Other Don't know

21%

21%

2%

149

Market shares (Black African owned businesses)

4% 1% 5% 3%

2%

29%

Barclays Natwest 13% Royal Bank of Scotland HSBC Lloyds TSB Bank of Scotland The Halifax Abbey National Other Don't know

19% 21% 2%

Base: All businesses by ethnic group. Indian=202 Pakistani=202 Bangladeshi=103 Black Caribbean=203 Black African=200

5.2 Number of finance providers

Fraser (2005) highlighted the exclusivity of the relationship with the main finance provider; about 60% of UK SMEs use only a single finance provider. From the

businesss perspective a single financial relationship may be easier to manage than spreading finances across several providers. Also SMEs tend to use around 3 financial products thereby placing an upper limit on the number of financial providers which could be used (see Table A4.1). From the perspective of the finance provider exclusivity locks the customer into the relationship and increases the revenue flow from the customer. From a joint perspective an exclusive financial relationship can increase the flow of information from the business to the finance provider making it easier for the latter to

150

assess risk. In principle this will improve access to finance at least amongst businesses which send favourable signals to their finance providers.

Table A5.2 indicates that:

The average number of finance providers across ethnic groups is around 1.5. The majority of businesses have one main finance provider: between 59.3% of WBs and 71.1% of Pakistani businesses. Across all ethnic groups the likelihood of having three or more financial providers is less than 10%

Figure 5.2.1: Number of finance providers

Number of finance providers (Indian owned businesses)

1% 7% 1%

One 30% Two Three Four Five 62%

151

Number of finance providers (Pakistani owned businesses)

1% 8%

20% One Two Three Four Five

71%

Number of financed providers (Bangladeshi owned businesses)

1% 8%

22% One Two Three Four

69%

152

Number of finance providers (Black Caribbean owned businesses)

5%

30%

One Two Three

65%

Number of finance providers (Black African owned businesses)

7%

27% One Two Three

66%

153

Number of finance providers (White owned businesses)

8%

1% 1%

31%

59%

One Two Three Four Five Six

Base: All businesses by ethnic group. Indian=202 Pakistani=202 Bangladeshi=103 Black Caribbean=203 Black African=200 White=2,373

5.3 Length of relationship with main provider of finance

Fraser (2005) also highlighted that financial relationships tend to be long; the average relationship amongst UK SMEs was reported as being around 15 years. It was argued in that report that finance providers prefer longer relationships because they can use the accumulated information on the firms accounts to distinguish good from bad investment propositions. Stability may also be preferred by businesses inasmuch as it improves their access to finance. Start-ups are clearly at a disadvantage in this regard due to the absence of a track record to establish their credentials with finance providers. In this context, it was noted in Chapter Two that non-Indian EMBs are younger on average than Indian and White owned businesses. These younger ages may therefore be an

independent source of financial disadvantage regardless of ethnicity.

154

The following table reports absolute relationship lengths and relationship lengths relative to business age. These results show that:

Indian and White owned businesses have the longest average relationship lengths (11 and 15 years respectively). Non-Indian EMBs have significantly shorter relationships; these are between 4 and 6 years. These differences in absolute relationship lengths are to be expected since nonIndian EMBs have a higher proportion of start-ups than Indian and White owned businesses.

However there are no significant differences in relationship lengths relative to business age. business. These relationship lengths are about 75% of the age of the

The results for relative relationship lengths indicate that preferences for stable financial relationships are common across ethnic groups. However the differences in absolute relationship lengths suggest that non-Indian EMBs may be financially disadvantaged due to a lack of track record regardless of their ethnicity.

Table 5.3.1: Average length of relationship with main provider of finance

Average length (years) 11.3 6.3 4.3 5.8 4.6 14.9 % of business age 70.8% 74.2% 60.8% 78.3% 78.8% 80.2% Std. Err. 0.7 0.5 0.5 0.4 0.3 0.5 [95% Conf. 9.9 5.3 3.3 5.0 3.9 13.9 Interval] 12.6 7.2 5.4 6.6 5.2 15.9

Indian Pakistani Bangladeshi Black Caribbean Black African White

Indian Pakistani Bangladeshi Black Caribbean Black African White

Base: All businesses by ethnic group. Indian=202 Pakistani=202 Bangladeshi=103 Black Caribbean=203 Black African=200 White=2,373

4.7% 3.7% 8.6% 3.9% 3.8% 2.3%

61.6% 66.9% 43.8% 70.5% 71.4% 75.8%

80.1% 81.6% 77.8% 86.1% 86.2% 84.7%

155

Figure 5.3.1: Average length of relationship with main provider of finance

16 14.9 78.3% 14 70.8% 12 74.2% 70.00% 11.3 60.8% 10 50.00% 8 40.00% 6.3 6 4.3 4 20.00% 5.8 4.6 30.00% Years % of business age 60.00% 78.8% 80.2% 80.00% 90.00%

10.00%

0 Indian Pakistani Bangladeshi Black Caribbean Black African White

0.00%

Base: All businesses by ethnic group. Indian=202 Pakistani=202 Bangladeshi=103 Black Caribbean=203 Black African=200 White=2,373

5.4 Satisfaction with main provider of finance, bank charges 19 and methods of communication

Table A5.3 reports levels of customer satisfaction with price and service aspects of the main financial relationship. These results suggest that:

Indian and White owned businesses are the most satisfied with the availability of finance (26.7% and 34.7% respectively are very satisfied). Black Caribbean and Black African businesses are the least satisfied with the availability of finance (20.2% and 24.3% respectively are very dissatisfied).

19

These charges include money transmission charges but not loan interest charges.

156

WBs are the most satisfied with the level of bank charges (18.2% are very satisfied) whereas Black owned businesses are the least satisfied (23.7% and 19.7% of Black Caribbean and Black African businesses respectively are very dissatisfied with bank charges).

WBs are the most satisfied with other aspects of the relationship covering: the range of services on offer; staff competence and efficiency; and the level of understanding of their business.

Black owned businesses tend to be the most dissatisfied with these aspects of service.

Figure 5.4.1: Satisfaction with main provider of finance

Availability of finance
60%

52% 50% 49%

43% 40% 34% 35% 29% 24% 20% 20% 18% 17% 14% 10% 9% 11% 8% 15% 11% 11% 9% 7% 4% 15% 13% 20% 21% 17% 25% Very satisfied Fairly satisfied 30% 27% 29% Fairly dissatisfied Very dissatisfied Cant say

8%

5%

0% Indian Pakistani Bangladeshi Black Caribbean Black African White

157

Bank charges
60%

51% 50% 46% 43% 41% 40% 33% 30% 25% 24% 21% 20% 16% 15% 13% 10% 4% 8% 6% 13% 11% 10% 10% 7% 11% 7% 16% 14% 15% 29% 27% 25% 20% 20% 18% Very satisfied Fairly satisfied Fairly dissatisfied Very dissatisfied Cant say

0% Indian Pakistani Bangladeshi Black Caribbean Black African White

Range of services offered

80%

70% 70%

60%

59%

60% 55%

58% 51%

50% Very satisfied Fairly satisfied Fairly dissatisfied Very dissatisfied Cant say

40% 32% 30% 28% 22% 20% 18% 19%

20%

10%

8% 4% 1% 4%5% 3%

8% 6% 4%

9% 8% 8%

10% 8%8% 6% 5% 2%

0% Indian Pakistani Bangladeshi Black Caribbean Black African White

158

Competence of staff
60% 54% 52% 50% 49% 48% 45% 43% 40% 35% 34% 30% 34% 29% Very satisfied Fairly satisfied Fairly dissatisfied Very dissatisfied Cant say 38% 55%

20%

10%

8% 6% 5% 3% 2% 1% Pakistani 5% 4% 3%

10% 8% 4%

7% 5% 1%

5% 4% 3%

0% Indian Bangladeshi Black Caribbean Black African White

Efficiency of service
60% 56%

57% 53%

50%

50% 46% 47%

40% 40% 36% 32% 30% 26% 27% 31% Very satisfied Fairly satisfied Fairly dissatisfied Very dissatisfied Cant say

20%

10%

8% 4% 1%

9%9%

10% 6%

10% 9%

8%7% 2%

7% 5%

2%

1% Bangladeshi

1% Black Caribbean

1% White

0% Indian Pakistani Black African

159

Understanding of your business

60% 59%

52% 50% 50%

42% 41% 40% 38% Very satisfied Fairly satisfied Fairly dissatisfied Very dissatisfied Cant say

30% 30% 23% 21% 20% 16% 14% 20%

31% 29%

17% 15% 12% 9% 5% 5%

10%

10% 7% 4%

10% 6% 4%

10% 7% 7% 8%

0% Indian Pakistani Bangladeshi Black Caribbean Black African White

Base: All businesses by ethnic group reporting levels of satisfaction with main finance provider. Indian=196 Pakistani=192 Bangladeshi=98 Black Caribbean=193 Black African=194 White=2,325

The preceding analysis indicates that across all ethnic groups the issue of bank charges is the area where businesses are least satisfied with their main bank. The following table reports the actual levels of these charges and the charge per 100,000 of turnover (to give a measure which is independent from firm size). Table 5.4.1 shows that:

The levels of EMB bank charges are generally higher than amongst WBs. In particular WBs pay significantly less (65) in actual bank charges than Pakistani (150) and Bangladeshi (170) businesses. Looking at the level of charges per 100,000 of turnover, Black owned businesses pay significantly higher charges (about 190) than all other ethnic groups with the exception of Bangladeshi owned businesses.

These results suggest that Pakistani owned businesses pay higher charges than White owned businesses because the former group of businesses are larger on average (see

160

Tables A2.1 and A2.2). However Black owned businesses pay higher charges than all other groups, except Bangladeshi owned businesses, regardless of firm size. A followup regression analysis amongst the sample of EMBs indicates that Black owned businesses pay higher charges per 100,000 of turnover than Indian businesses even having controlled for a wide range of business characteristics.
20

Table 5.4.1: Average monthly bank charges (absolute and relative to turnover)
Average amount () Indian Pakistani Bangladeshi Black Caribbean Black African White 132.8 149.9 169.6 99.2 137.5 65.0 Average amount per 100,000 of turnover Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: All businesses reporting bank charges ethnic group. Indian=159 Pakistani=145 Bangladeshi=73 Black Caribbean=136 Black African=139 White=2,137

Std. Err. 37.7 31.5 37.8 33.3 37.9 5.6

[95% Conf. 58.5 87.6 94.1 33.3 62.7 53.9

Interval] 207.2 212.2 245.0 165.0 212.4 76.0

73.3 107.6 137.1 192.4 187.3 64.2

18.3 36.5 47.9 36.9 34.5 5.8

37.0 35.3 41.0 121.2 118.8 52.8

109.5 180.0 233.2 264.6 255.8 75.7

The level of satisfaction with financial relationships may be affected by the methods of communication between the bank and the business. In this regard, Table A5.4 suggests that:

A visit to the branch is the main method of communication for all ethnic groups except for Black African businesses which tend to communicate by telephone.

20 The variables in this regression included further controls for firm size (number of employees and a quadratic relationship for turnover), sector (2-digit SIC codes), legal status, business age, financial delinquency, region and main bank.

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The internet is the main point of contact for between 10% (Indian) and 18% (Black African) of businesses.

It is possible that remoter financial relationships amongst Black African businesses contribute to their higher levels of dissatisfaction with the relationship. The frustrations of telephone banking are well known amongst bank account holders regardless of their ethnicity. More generally, however it is possible that higher concentrations of EMB

accounts held at the Big Four banks may contribute to their higher average bank charges (Table 5.4.1), and possibly also their higher levels of dissatisfaction (Table A5.3), compared to WBs.

Figure 5.4.2: Most frequently used method of communication with main finance provider
Main form of communication (Indian owned businesses)

1% 10% 1% 2%

Visiting branch 44% By telephone By mail Cash machine Internet No contact Other Dont Know

43%

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Main form of communication (Pakistani owned businesses)

1% 1% 1% 12%

1% 2%

Visiting branch By telephone 45% By mail Cash machine Internet No contact Other Dont Know

38%

Main form of communication (Bangladeshi owned businesses)

1% 14%

Visiting branch By telephone Cash machine Other 26% 59%

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Main form of communication (Black Caribbean owned businesses)

1% 1% 14%

3% 1% Visiting branch 45% By telephone By mail Cash machine Internet Other Dont Know

36%

Main form of communication (Black African owned businesses)

1%

18%

37% 2% Visiting branch 4% By telephone By mail Cash machine Internet No contact

39%

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Main form of communication (White owned businesses)

1% 15%

3% Visiting branch By telephone 6% 47% By mail Cash machine Internet No contact Other Dont Know

29%

Base: All businesses by ethnic group reporting main form of communication with main finance provider. Indian=196 Pakistani=192 Bangladeshi=98 Black Caribbean=193 Black African=194 White=2,325

5.5 Switching

The extent of customer switching between different providers of a product is often viewed as a measure of the level of competition in the market for that product. This measure is problematic in the context of banking services given the importance to both parties of an established financial relationship to overcome information problems. In other words classical notions of competition, which are based on well informed market participants, are less applicable in the context of banking services. Nonetheless steps to promote fast and error free switching are an explicit recommendation in the Competition Commissions 2002 report into the supply of SME banking services (which recommendations came into legal force in January 2003: Competition Commission, 2002; see Fraser, 2005, for a more detailed discussion and analysis of these recommendations).

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The following table reports the percentage of businesses which have switched their main bank account in the last 3 years. This table shows that, regardless of ethnicity, typically fewer than 1 in 10 businesses have switched bank accounts in the last 3 years. Switching is not significantly higher amongst EMBs (Black owned businesses in particular) despite higher levels of bank charges and generally lower levels of satisfaction with banking services.
21

Table 5.5.1: Percentage of businesses which have switched their main bank account in the last 3 years
Percentage (%) Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: All businesses by ethnic group. Indian=202 Pakistani=202 Bangladeshi=103 Black Caribbean=203 Black African=200 White=2,373

Std. Err. 1.9% 2.2% 3.2% 2.3% 2.1% 1.0%

[95% Conf. 3.0% 5.6% 6.2% 7.4% 5.4% 5.5%

Interval] 10.8% 14.3% 19.2% 16.5% 13.8% 9.6%

5.8% 9.0% 11.2% 11.2% 8.7% 7.3%

5.6 Financial delinquency and loan margins

An important factor in determining the risk of lending to a business is whether it has made timely repayments on previous borrowings. Failure to keep up with loan repayments will make lenders think twice before providing new finance in the future or may add a risk premium to future borrowings.

21 It might have been expected that switching rates amongst EMBs would be higher than amongst WBs since the EMB survey covers a later switching period (2002-2005) than the main UKSMEF survey (2001-2004) with the effect that the Competition Commissions recommendations have had a longer time to impact on the EMBs. However, based on the evidence in Table 5.5.1 switching rates in the later period do not appear to be higher.

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The following table reports the incidence of at least one missed loan repayment over the last year. This table shows that:

The lowest incidence of missed repayments is amongst WBs (2.9%). The highest incidence is amongst Black Caribbean businesses (18.2%), significantly higher than amongst WBs.

Table 5.6.1: Incidence of missed debt repayments in the last 12 months

Percentage (%) Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: Businesses with loans or leases by ethnic group: Indian=102 Pakistani=81 Bangladeshi=36 Black Caribbean=71 Black African=54 White=1,273

Std. Err. 2.0% 2.2% 5.1% 5.0% 5.0% 1.5%

[95% Conf. 0.9% 0.8% 2.8% 10.2% 5.5% 1.0%

Interval] 10.7% 12.1% 25.7% 30.2% 26.4% 7.9%

3.2% 3.2% 9.1% 18.2% 12.6% 2.9%

Table 5.6.2 reports incidences of unauthorised borrowing on an overdraft. These results show that:

50.5% of Black African businesses exceeded their authorised overdraft limit at least once in the last year. This figure is significantly higher than amongst Pakistani (29.7%) and White owned businesses (24.7%). The difference in unauthorized borrowing rates between Black Caribbean (40.8%) and White owned businesses is also significant.

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Table 5.6.2: Incidence of exceeding overdraft limit in the last 12 months

Percentage (%) Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: Businesses with overdrafts by ethnic group: Indian=138 Pakistani=131 Bangladeshi=61 Black Caribbean=99 Black African=94 White=1,563

Std. Err. 4.6% 4.4% 6.4% 5.1% 5.7% 2.3%

[95% Conf. 22.7% 21.8% 27.1% 31.1% 39.3% 20.5%

Interval] 40.7% 38.9% 52.2% 51.2% 61.6% 29.4%

31.0% 29.7% 38.9% 40.8% 50.5% 24.7%

High non-payment rates and unauthorized borrowing may partly explain the poorer access to finance noted in previous chapters amongst Black owned business. In

addition it has been noted in this chapter that Black owned businesses, regardless of firm size, pay higher bank charges than most other ethnic groups. Again, this difference may be due to financial delinquency.

Financial delinquency may also result in Black owned businesses incurring higher borrowing costs relative to other businesses. In this context the following tables report the cost of borrowing (term loan and overdraft margins over Bank of England base rate).

Regarding term loan margins:

WBs paid the lowest margins on average (2.3 points over base). Black African businesses paid the highest margins on average (3.7 points over base). These differences are not, however, statistically significant.

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Table 5.6.3: Average term loan margins over Bank of England base rate
Average margin (% points over base) Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: Businesses with term loans: Indian=71 Pakistani=46 Bangladeshi=19 Black Caribbean=26 Black African=23 White=696

Std. Err.

[95% Conf.

Interval]

2.3 3.2 3.5 3.1 3.7 2.3

0.2 0.6 0.8 0.8 0.5 0.2

1.8 2.1 1.9 1.6 2.6 1.9

2.8 4.3 5.1 4.6 4.7 2.6

Margins for overdrafts are reported in the following table. These results show that:

WBs paid the lowest margins on overdrafts (2.0 points over base). Pakistani owned businesses paid the highest overdraft margins (3.5 points over base) which figure is significantly higher than amongst WBs.

Table 5.6.4: Average overdraft margins over Bank of England base rate
Average margin (% points over base) Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: Businesses with overdrafts: Indian=107 Pakistani=81 Bangladeshi=43 Black Caribbean=41 Black African=48 White=1,021

Std. Err.

[95% Conf.

Interval]

2.2 3.5 2.3 3.2 2.9 2.0

0.3 0.5 0.4 0.6 0.5 0.2

1.7 2.5 1.6 2.0 1.9 1.6

2.7 4.5 3.1 4.4 3.9 2.4

There would appear to be a direct correspondence between the higher tendency to fall behind with loan re-payments amongst Black African businesses and their relatively high (if not significantly higher) loan margins. Given that Pakistani businesses have relatively low rates of unauthorized borrowing on overdrafts their relatively high margins on overdrafts would seem to be due to other risk factors. One possible explanation, which

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applies to both Pakistani and Black African businesses, is that these ethnic groups contain high incidences of high-growth/high-risk businesses which naturally attract bigger loan margins than less risky borrowers. 22

Summary

This chapter has added findings on banking relationships to the earlier findings on business/owner characteristics and access to finance. The analysis indicates that there is a higher concentration of EMBs which are banked with the Big Four compared with WBs. Possibly as a consequence of this higher concentration, bank charges and general levels of dissatisfaction are higher amongst EMBs (in particular Black owned businesses) relative to WBs. In the case of Pakistani businesses, higher bank charges may be explained by firm size. However, amongst Black owned businesses, higher bank charges cannot be explained by differences in size or other firm characteristics.

Despite the higher levels of dissatisfaction with service and higher bank charges, there are no significant differences in bank switching rates between EMBs and WBs. Incidences of financial delinquency are higher amongst Black owned businesses than WBs. However there are no significant differences between loan margins amongst

Black and White businesses respectively (although the cost of overdraft borrowing is significantly higher for Pakistani businesses relative to WBs).

The final chapter draws the analyses of previous chapters together by examining the role of banking relationships and business/owner characteristics in explaining differences in access to finance and the cost of borrowing amongst EMBs.

22

Table A2.7 showed that the incidence of fast growing Pakistani and Black African businesses, at around a third of the respective populations, is higher (albeit not significantly higher) than in Indian and White business populations.

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Chapter Five: summary of key significant findings Market concentration: EMB bank accounts tend to be more heavily concentrated in the Big Four than amongst WBs (about 88% versus 77% respectively). Relationships: Non-Indian EMBs have significantly shorter relationships than Indian and White businesses: (4-6 years versus 11-15 years respectively). Bank charges: WBs pay significantly less (65) in actual bank charges than Pakistani (150) and Bangladeshi (170) businesses. Black owned businesses pay significantly higher charges per 100,000 of turnover (about 190) than all other ethnic groups with the exception of Bangladeshi owned businesses. Financial delinquency: The highest incidence of missed loan repayments is amongst Black Caribbean businesses (18.2%), significantly higher than amongst WBs (2.9%). 50.5% of Black African businesses and 40.8% of Black Caribbean businesses exceeded their authorised overdraft limit at least once in the last year. This is higher than amongst WBs (24.7%) Overdraft margins: WBs paid the lowest margins on overdrafts (2.0 points over base) whereas Pakistani businesses paid the highest overdraft margins (3.5 points over base).

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6. Econometric analysis of finance outcomes

In this chapter estimates are presented of econometric models for the following finance outcomes:

Rejection Discouragement Finance gaps Loan margins

The objectives of the analysis in this chapter are to:

Examine the roles of various well established risk factors in explaining differences in finance outcomes across ethnic groups (risk based discrimination). Disentangle the role of ethnicity from the role of established risk factors in explaining differences in finance outcomes.

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This analysis is conducted by regressing finance outcomes on risk factors, financial relationships and ethnicity. 23 A residual role of ethnicity in explaining finance outcomes could be due to discrimination on ethnic grounds. 24 However it should be noted that this analysis does not have access to the same information which was available to the finance provider at the time of credit allocation. Therefore differences in finance

outcomes, which are apparently due to ethnicity, may reflect differences between the data collected in this survey and the data available to finance providers when the loan decisions were made.

The analysis begins by reviewing the issues for finance outcomes and risk factors highlighted in previous chapters of this report. Subsequently estimates of the

differences in finance outcomes amongst EMBs, controlling for risk factors, are presented. This analysis is restricted to EMBs only since the data-sets for EMBs and WBs have not been integrated. This is primarily due to unavoidable differences in the weighting measures used in the EMB and main survey data-sets respectively (see Chapter One). In this regard, ethnic comparisons are made relative to Indian owned businesses which, on the evidence presented in this report, fare as well as WBs in terms of their finance outcomes.

The analysis in previous chapters has drawn attention to the following issues for EMB finances:

Black owned businesses are significantly more likely to experience outright rejection or to feel discouraged from applying for finance than Indian, Pakistani and White owned businesses.

Black owned businesses face finance gaps which are significantly higher than funding shortfalls amongst Indian owned businesses with the same level of assets.

The analysis of rejection and discouragement involves the use of a probit model which is relevant in the context of a binary (0/1) dependent variable. The analysis of relative finance gaps involves the use of tobit models which are relevant in the context of a censored dependent variable (in the case of finance gaps relative to asset bases the data are censored at zero; in the case of finance gaps relative to the amount of finance sought the data are censored at both zero and unity). The analyses of loan margins involve basic linear regressions. 24 This discrimination, if it exists, could be direct discrimination (based on prejudice) or statistical discrimination. However, it is not possible in this analysis to distinguish between the two forms.
23

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The cost of borrowing is significantly higher for Pakistani and Black African businesses relative to White owned businesses.

Set against these finance outcomes the report has also shown that there are differences in key risk factors across ethnic groups. It is possible that differences in these risk factors may account for some or all of the observed differences in finance outcomes across ethnic groups (risk-based discrimination). The reports findings on these risk factors are summarized below. The anticipated effect of these risk factors on access to finance (+ positive/beneficial effect; negative effect) are also noted:

Business size (+): Small firms are more opaque than larger firms in terms of the kinds of hard information that finance providers require to carry out their risk assessments. For example financial reporting requirements are less stringent for smaller companies and sole traders are only required to file an income tax return. This opacity of information contributes to the higher risk associated with lending to smaller firms. Also, the high fixed costs of screening and monitoring borrowers may make lending comparatively small amounts unprofitable for finance providers. In these regards, by turnover and assets, Bangladeshi and Black owned businesses tend to be smaller than businesses from Indian, Pakistani and White ethnic groups. It would be expected that these smaller sizes would contribute to the poorer access to finance observed amongst Bangladeshi and Black owned businesses.

Sector (+/): As discussed in Chapter Two sector risk is a function of the level of sunk costs and competition in the sector. Sectors with low sunk costs will tend to be more competitive reducing profit margins and the probability of survival of any given business in that sector. Such sectors will therefore be more risky than sectors in which there are greater opportunities for establishing a niche. 25 In this regard the analysis in Appendix A showed that Black and White owned businesses most commonly operate in Real Estate, Renting and Business Services. This sector has a higher average return on assets than Wholesale and Retail the sector in which Asian owned businesses tend to operate.

25

Also some sectors may be particularly affected by technological and/or regulatory change making them appear more risky than other sectors.

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Academic and financial qualifications (+/): These factors relate to the underlying quality of the individual running the business. Inasmuch as finance providers believe these qualifications will improve the businesss performance, it would be expected that more qualified individuals would experience fewer financial constraints than less qualified individuals. However more qualified individuals may have higher capital

demands which will increase the likelihood that the business will run into financial constraints. On this issue, Indian, Pakistani and Bangladeshi business owners tend to be educated to undergraduate degree level. On the other hand, Black Caribbean

business owners tend to have only O-levels whereas Black African business owners tend to be educated to a postgraduate level.

Track records/owner-managers business experience (+): Finance providers are often more interested in the track record of the entrepreneur than the idea which underlies the business. An individual who has established his or her acumen and

commitment is more likely to engender the confidence of finance providers than an inexperienced individual with an innovative business idea. In this regard Indian and White owner managers have significantly higher levels of experience relative to owner managers from other ethnic groups. This difference may help to explain the relatively favourable access to finance enjoyed by Indian and White owned businesses.

Personal and business assets (security) (+): Finance providers will often require funding to be secured on business and/or personal assets to cover the eventuality of business failure. Data from UKSMEF (2004) indicates that about two-thirds of loans above 25,000 are secured on business and/or personal assets. This report has shown that Bangladeshi and Black owned businesses have fewer business and personal assets than other ethnic groups. This suggests that a lack of available security may contribute to the relatively poor access to finance amongst Bangladeshi and Black owned businesses.

Deprivation (): Businesses in deprived areas may tend to be more marginal in character, possibly set up in response to economic necessity and with fewer resources available to ensure their survival. These factors will tend to result in poorer business performance so that businesses in deprived areas will tend to be riskier for finance

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providers. 26 In this regard the analysis in Chapter Two showed that: EMBs, in particular Bangladeshi owned businesses, tend to be located in more deprived areas than WBs; and that deprivation is associated with lower business performance. Accordingly

deprivation may contribute to poorer access to finance amongst EMBs and in particular Bangladeshi owned businesses.

Profitability (+): A businesss profitability provides an indication of how well it is being run. In particular the return on assets (ROA) is often used by investors to assess the effectiveness of a businesss management. In this regard the report has shown that Bangladeshi and Black African businesses have relatively low ROAs whereas WBs have a high ROA. These differences in ROA may help to explain the relatively poorer access to finance amongst Bangladeshi and Black owned businesses.

Business age (+): The likelihood of a businesss survival tends to increase with its age so the fact that the business has survived to date is a good indication that it will carry on surviving into the future. In other words, lending risk diminishes as the uncertainty about the firms prospects becomes resolved over time. Also, there are fewer information problems regarding older firms since there is a business track record against which finance providers can form a risk assessment. Regarding business ages the report has found that EMBs tend to be younger than WBs. This is true in particular for Bangladeshi businesses which have the highest proportion of start-ups (34%) and for Black African businesses which have the youngest average age (about 6 years). These younger ages could again place Bangladeshi and Black owned businesses at a financial disadvantage relative to other ethnic groups.

Legal form and ownership structure (+/): The choice of legal form and ownership structure of a business in part reflects the level of aversion of the entrepreneur to external control. A highly control averse entrepreneur may prefer to run the business as a sole trader or as a family owned company even if this choice is detrimental to the performance of the business. This control aversion may therefore conflict with the

interests of external investors and reduce the businesss viability as an investment

26

Results from the Family Resources Survey, reported in Bank of England (2002), indicate that small businesses located in deprived areas are on average: younger; have fewer assets; less profitable; less likely to compile financial accounts; and less likely to hold bank accounts than businesses located in less deprived areas.

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proposition. A counter argument is that since limited liability restricts owners exposure to downside risk, owners of companies may be more likely to undertake riskier activities compared to sole traders (for whom liability is unlimited). 27 The analysis of legal forms and ownership structures discussed in Chapter Two and Appendix A showed that Asian and Black African businesses tend to be organized as limited liability companies whereas Black Caribbean and White owned businesses tend to be run as sole traders. Also fewer Black Caribbean businesses are family owned than Indian or White owned businesses. The relatively poorer access to finance of Black Caribbean businesses would seem to conflict with the control aversion theory although there could be other factors masking this relationship.

Financial relationships: The discussion in Chapter Five highlighted the importance of financial relationships in overcoming the information deficiencies that can lead to financial constraints. In particular longer and exclusive relationships are expected to improve access to finance:

Length of relationship (+): The report has shown that Pakistani, Bangladeshi and Black-owned businesses have shorter financial relationships than Indian or White owned businesses. This difference would be expected to contribute to the relatively favourable access to finance observed amongst Indian and White owned businesses.

Number of finance providers ():

The report does not find significant

differences in the numbers of finance providers used by businesses from different ethnic groups. This factor would therefore not be expected to

contribute to differences in access to finance across ethnic groups.

Missed loan re-payments and unauthorized borrowing on overdrafts (financial delinquency) (): Delinquent financial behaviour will result in a bad credit record and score. This will increase the likelihood of being denied finance or raise borrowing costs. The incidence of financial delinquency is higher amongst Black owned businesses than
27 Evidence from SFLG data supports this second argument. Default rates on SFLG loans are about 20 percentage points lower than the average (around 35%) amongst sole traders (see Graham, 2004). This suggests that the absence of limited liability promotes less risky behaviour amongst sole traders (due to the fear of losing ones house for example).

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other ethnic groups.

This difference would be expected to contribute to the poorer

access to finance observed amongst Black owned businesses.

The models for rejection, discouragement, finance gaps and loan margins which are reported in the following sections use the above list of risk factors to explain variations in access to finance. After controlling for these risk factors any additional role of ethnicity in explaining access to finance offers prima facie evidence of ethnic discrimination in SME financial markets. 28 However, other non-ethnic interpretations of these results are possible and the conclusions will be careful to highlight these alternatives.

6.1 Rejection

The marginal effects in the following table show the effect of observed risk factors on the probability of rejection. These results show that:

The main determinant of rejection is financial delinquency missed loan repayments or unauthorized overdraft borrowing increase the probability of rejection by 8.6 percentage points (statistically significant at the 5% level).

The use of 6 financial products is associated with lower rejection rates (significant at the 10% level). Businesses which have managed to obtain several financial products are likely to be creditworthy businesses and have been screened several times by finance providers.

Construction businesses are about 3 percentage points less likely to experience rejection than manufacturing businesses (significant at the 10% level).

28

In principle, loans allocated by credit scoring should not reveal any unexplained ethnicity variations since it would be illegal for finance providers to use ethnicity in their credit scoring models. However, it is not possible with these data to distinguish loan applications which involved credit scoring from those which involved other lending technologies such as relationship lending (which introduce more scope for discretion on the part of the lender). Also, as already mentioned, it is possible that differences in the data available to lenders versus the data available for the current analysis could lead to apparent ethnic differences (even if the loan applications were credit scored).

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EMBs located in London are 6.2 percentage points more likely to experience financial rejection than EMBs located outside of London and the South-East (significant at the 10% level).

Having controlled for observed risk factors and financial relationships ethnicity plays no role in explaining differences in rejection rates.

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Table 6.1.1: Determinants of financial rejection1

Marginal effect2 Relationship length (10 years) 2 Finance providers 3 Finance providers 2 Financial products 3 Financial products 4 Financial products 6 Financial products Turnover ( m) 1--9 employees 10--49 employees 50-249 employees Business age (10 years) Sole trader Ltd Co. Family owned Return on assets Undergraduate education Postgraduate education Financial qualification Business experience Net worth ( m) Female owner Financial delinquency Construction Wholesale and retail Hotels and restaurants Transport, storage and communications Real estate, renting and business services Health and social work Other community, social and personal services Deprivation: Second quartile 0.001 0.022 0.978 -0.042 0.043 -0.004 -0.031 0.049 -0.008 -0.019 0.069 -0.029 -0.080 -0.011 0.152 -0.008 -0.015 0.015 0.078 0.017 -0.015 -0.018 -0.009 -0.098 0.000 -0.009 0.015 0.086 -0.027 -0.059 -0.020 0.103 -0.039 0.022 0.006 Std. Error 0.034 0.019 0.068 0.029 0.027 0.053 0.017 0.049 0.034 0.165 0.045 0.019 0.043 0.058 0.019 0.009 0.021 0.025 0.105 0.013 0.016 0.044 0.037 0.016 0.046 0.021 0.126 0.025 0.085 0.052 P-value 0.913 0.106 0.468 0.784 0.469 0.195 0.084 0.105 0.747 0.357 0.860 0.421 0.735 0.178 0.363 0.103 0.378 0.734 0.352 0.987 0.595 0.732 0.021 0.087 0.200 0.341 0.415 0.125 0.796 0.910 [95% conf. -0.071 -0.069 -0.084 -0.065 -0.072 -0.035 -0.061 -0.177 -0.077 -0.172 -0.097 -0.053 -0.070 -0.036 -0.019 -0.034 -0.059 -0.058 -0.304 -0.025 -0.040 -0.071 0.013 -0.057 -0.149 -0.061 -0.144 -0.088 -0.144 -0.097 Int.] 0.063 0.007 0.183 0.049 0.033 0.173 0.004 0.017 0.055 0.476 0.081 0.022 0.099 0.192 0.053 0.003 0.022 0.040 0.108 0.025 0.023 0.101 0.158 0.004 0.031 0.021 0.350 0.011 0.188 0.108

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Deprivation: Third quartile London South East Pakistani Bangladeshi Black Caribbean Black African N=197

-0.022 0.062 0.217 0.002 -0.019 -0.010 0.092

0.020 0.033 0.170 0.027 0.018 0.030 0.090

0.278 0.060 0.201 0.944 0.301 0.742 0.308

-0.062 -0.003 -0.116 -0.051 -0.055 -0.069 -0.085

0.018 0.127 0.550 0.055 0.017 0.049 0.268

2 (p-value)=0.078
Notes: 1. 2. Model estimated using a survey weighted probit estimator. Marginal effects measure the effect of a unit change in the explanatory variables on the probability of the outcome occurring.

6.2 Financial discouragement

The key risk factors which influence feelings of discouragement from applying for finance are:

Profitability: A 10 percentage point increase in the return on assets diminishes the probability of discouragement by 0.4 percentage points (significant at the 5% level). This result suggests that less profitable businesses self-select out of

financial markets presumably because they believe that finance providers will detect their low performance and deny them finance. This is a fairly benign result as it would be of greater concern for policy makers if, instead, good quality businesses were de-selecting themselves from the loan pool. suggests that self-selection into/out of financial markets is efficient. Financial qualifications increase the likelihood of discouragement by 12 percentage points (significant at the 5% level). This result is surprising since it would be expected that a qualified financial manager would be more confident in their ability to secure finance and so less likely to feel discouraged. This result probably explains the high discouragement rates amongst Black African businesses which have high rates of financially qualified management. The This result

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estimates for ethnicity show that being a Black African owner manager per se does not lead to higher financial discouragement. Owners of businesses in Other Community, Social and Personal Services are 65 percentage points more likely to feel discouraged than an owner of a Manufacturing business (significant at the 5% level). Owner-managers of businesses with 1-9 employees are more than 6 percentage points more likely to feel discouraged than owners of businesses with no employees (significant at the 10% level). Sole traders are over 27 percentage points more likely to feel discouraged than partnerships (significant at the 10% level). An additional 10 years of business experience reduces the likelihood of discouragement by over 5 percentage points. A longer track record is beneficial for access to finance so an experienced owner manager is less likely to expect to be denied finance (significant at the 10% level). An additional 1m of personal assets reduces the likelihood of discouragement by 6.5 percentage points (significant at the 10% level). These personal assets can be used as security on a loan so the owner manager is less likely to expect to be denied finance. Financial delinquency increases the likelihood of discouragement by almost 11 percentage points (significant at the 10% level). A business owner who has failed to keep up with repayments is probably aware that this behaviour will have harmed their credit score. Financially delinquent individuals may therefore

expect to be denied finance and therefore feel discouraged from applying in the first instance. EMBs located in London are 8.1 percentage points more likely to feel discouraged than EMBs located outside of London and the South-East (significant at the 10% level). There is no residual role for ethnicity in explaining discouragement having controlled for risk and financial relationships.

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Table 6.2.1: Determinants of financial discouragement1

Marginal effect2 Relationship length (10 years) 2 Finance providers 3 Finance providers 2 Financial products 3 Financial products 4 Financial products Turnover ( m) 1--9 employees 10--49 employees 50-249 employees Business age (10 years) Sole trader Ltd Co. Family owned Return on assets Undergraduate education Postgraduate education Financial qualification Business experience (10 years) Net worth ( m) Female owner Financial delinquency Construction Wholesale and retail Hotels and restaurants Transport, storage and communications Real estate, renting and business services Health and social work Other community, social and personal services Deprivation: Second quartile Deprivation: Third quartile 0.052 0.073 0.057 0.091 0.357 0.426 -0.059 -0.106 0.163 0.252 0.048 -0.046 -0.004 0.075 0.119 0.004 -0.047 0.064 0.047 -0.046 0.273 0.073 -0.008 -0.043 -0.013 0.031 0.120 -0.051 -0.065 -0.041 0.106 0.402 0.068 -0.011 0.062 0.172 0.671 Std. Error 0.052 0.037 0.066 0.112 0.109 0.069 0.042 0.034 0.135 0.048 0.153 0.077 0.059 0.016 0.049 0.071 0.052 0.029 0.035 0.041 0.060 0.301 0.080 0.095 0.154 0.146 0.247 P-value 0.350 0.212 0.958 0.504 0.275 0.958 0.263 0.060 0.727 0.333 0.075 0.343 0.892 0.008 0.796 0.658 0.021 0.075 0.060 0.320 0.076 0.182 0.390 0.904 0.689 0.238 0.007 [95% conf. -0.053 -0.118 -0.133 -0.145 -0.094 -0.132 -0.130 -0.003 -0.218 -0.140 -0.027 -0.078 -0.125 -0.075 -0.109 -0.108 0.018 -0.107 -0.133 -0.122 -0.011 -0.189 -0.088 -0.198 -0.240 -0.113 0.186 Int.] 0.149 0.026 0.126 0.295 0.332 0.139 0.035 0.131 0.312 0.047 0.572 0.223 0.108 -0.011 0.083 0.170 0.221 0.005 0.003 0.040 0.223 0.992 0.224 0.175 0.363 0.457 1.156

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Deprivation: Fourth quartile (least deprived) London South-East Pakistani Bangladeshi Black Caribbean Black African N=182

0.233 0.081 0.101 -0.017 -0.037 0.026 0.042

0.244 0.045 0.143 0.061 0.044 0.065 0.080

0.341 0.076 0.480 0.787 0.406 0.690 0.600

-0.246 -0.009 -0.180 -0.136 -0.124 -0.101 -0.115

0.712 0.170 0.382 0.103 0.050 0.153 0.200

2 (p-value)=0.264
Notes: 1. 2. Model estimated using a survey weighted probit estimator Marginal effects measure the effect of a unit change in the explanatory variables on the probability of the outcome occurring.

6.3 Finance gaps

Regarding absolute finance gaps:

Finance gaps increase by 953 for each additional 10 years with the main finance provider (relationship length; significant at the 10% level). Use of multiple finance providers and financial products reduce finance gaps (the use of six financial products reduces finance gaps by 2,188 holding other factors constant; significant at the 5% level).

EMBs with a female principal owner have funding gaps which are 662 lower on average than those with male principal owners (significant at the 5% level). Businesses operating in: transport, storage and communications; real estate, renting and business services; and financial intermediation, have lower funding gaps than manufacturing businesses (significant at the 10% level).

Businesses located in the second quartile of the distribution of deprived areas have finance gaps which are on average over 2,000 larger than those amongst businesses located in the most deprived areas (significant at the 10% level).

Businesses located in the fourth quartile of the distribution of deprived areas (i.e., the least deprived areas) have funding gaps which are on average around 900

184

lower than those amongst businesses located in the most deprived areas (significant at the 10% level). EMBs located in London experience finance gaps which are 2,072 larger than amongst EMBs located outside of London and the South-East (significant at the 10% level). After controlling for risk factors ethnicity remains an important determinant of finance gaps In particular, Pakistani owned businesses have an average finance gap which is 4,280 bigger than the finance gap for an otherwise similar Indian owned business (significant at the 5% level). Black African businesses experience an average finance gap which is 7,824 larger than that of an otherwise similar Indian owned business (significant at the 10% level).

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Table 6.3.1: Determinants of finance gaps (absolute gaps)1

Marginal effect2 Relationship length (10 years) 2 Finance providers 3 Finance providers 4 Finance providers 5 Finance providers 1 Financial product 2 Financial products 3 Financial products 4 Financial products 5 Financial products 6 Financial products 7 Financial products 8 Financial products Turnover ( m) 1--9 employees 1049 employees 50-249 employees Business age (10 years) Sole trader Ltd Co. Family owned Return on assets Undergraduate education Postgraduate education Financial qualification Business experience Net worth ( m) Female owner Financial delinquency Construction Wholesale and retail 953 -42 1,257 53,138 -603 -59 98 511 255 -2,188 -586 116 -854 492 2,693 -321 -452 1,591 376 52 -17 1,131 -4,799 -299 -151 -662 163 -528 -1,717 Std. Error 546 364 1,214 54,754 338 1,236 1,372 1,411 1,559 736 329 173 1,018 1,450 4,657 494 423 1,081 308 83 423 1,284 4,335 379 452 309 302 355 1,444 p-value 0.081 0.908 0.301 0.332 0.075 0.962 0.943 0.717 0.870 0.003 0.075 0.501 0.401 0.734 0.563 0.516 0.285 0.141 0.222 0.527 0.967 0.378 0.268 0.430 0.739 0.032 0.590 0.137 0.234 [95% conf. -117 -755 -1,123 -54,178 -1,265 -2,483 -2,590 -2,255 -2,799 -3,630 -1,230 -222 -2,850 -2,349 -6,435 -1,290 -1,282 -527 -227 -110 -847 -1,385 -13,296 -1,041 -1,037 -1,267 -429 -1,223 -4,547 Int.] 2,023 671 3,636 160,454 60 2,364 2,787 3,277 3,310 -746 58 454 1,141 3,333 11,821 648 377 3,709 980 215 812 3,647 3,698 443 735 -57 755 167 1,112

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Hotels and restaurants Transport, storage and communications Real estate, renting and business services Health and social work Other community, social and personal services Education Financial intermediation Deprivation: Second quartile Deprivation: Third quartile Deprivation: Fourth quartile (least deprived) London South-East Pakistani Bangladeshi Black Caribbean Black African

-229 -695 -1,692 -447 -439

602 372 987 373 341

0.704 0.062 0.086 0.231 0.198

-1,409 -1,425 -3,627 -1,178 -1,108

951 35 242 284 229

-682 2,120 3,875 -892

373 1,226 3,484 479

0.067 0.084 0.266 0.062

-1,413 -284 -2,953 -1,831

48 4,523 10,704 46

2,072 1,624 4,280 250 732 7,824

699 2,621 1,770 889 1,031 4,180

0.003 0.535 0.016 0.778 0.477 0.061

701 -3,512 811 -1,492 -1,288 -368

3,442 6,760 7,748 1,993 2,752 16,016

N=139

2 (p-value)=0.000
Notes: 1. 2. Model is estimated using a survey weighted tobit (censored regression) estimator since the dependent variable is censored at 0. Marginal effects measure the effect of a unit change in the explanatory variables on the value off the outcome.

The results for finance gaps relative to business assets follow a similar pattern to those reported for absolute finance gaps. In particular, regarding ethnicity:

Funding gaps are 9 percentage points larger for Pakistani owned businesses relative to Indian owned businesses with the same level of assets (significant at the 5% level).

This gap is almost 15 percentage points amongst Black African owned businesses (significant at the 10% level).

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Table 6.3.2: Determinants of finance gaps (relative to business assets)1

Marginal effect2 Relationship length (10 years) 2 Finance providers 3 Finance providers 4 Finance providers 5 Finance providers 1 Financial product 2 Financial products 3 Financial products 4 Financial products 5 Financial products 6 Financial products 7 Financial products 8 Financial products Turnover ( m) 1--9 employees 1049 employees 50-249 employees Business age (10 years) Sole trader Ltd Co. Family owned Return on assets Undergraduate education Postgraduate education Financial qualification Business experience Net worth ( m) Female owner Financial delinquency Construction 0.031 0.004 0.010 0.231 -0.018 0.178 0.129 0.071 0.295 -0.046 -0.018 -0.010 -0.079 -0.013 -0.014 -0.026 -0.011 0.060 -0.004 0.002 0.026 -0.003 -0.097 -0.010 0.017 -0.008 0.009 -0.017 Std. Error 0.012 0.012 0.019 0.309 0.007 0.217 0.138 0.063 0.270 0.016 0.007 0.009 0.084 0.012 0.009 0.010 0.013 0.029 0.013 0.003 0.030 0.012 0.089 0.010 0.009 0.018 0.009 0.008 p-value 0.009 0.737 0.594 0.454 0.009 0.412 0.351 0.258 0.273 0.004 0.008 0.296 0.350 0.285 0.113 0.010 0.383 0.036 0.783 0.416 0.383 0.831 0.273 0.350 0.072 0.668 0.306 0.027 [95% conf. 0.008 -0.019 -0.028 -0.374 -0.032 -0.247 -0.142 -0.052 -0.233 -0.077 -0.031 -0.028 -0.244 -0.036 -0.032 -0.046 -0.036 0.004 -0.029 -0.003 -0.033 -0.027 -0.271 -0.030 -0.002 -0.043 -0.009 -0.032 Int.] 0.054 0.027 0.048 0.836 -0.005 0.602 0.401 0.194 0.824 -0.015 -0.005 0.009 0.086 0.011 0.003 -0.006 0.014 0.116 0.021 0.008 0.086 0.021 0.076 0.011 0.036 0.028 0.027 -0.002

188

Wholesale and retail Hotels and restaurants Transport, storage and communications Real estate, renting and business services Health and social work Other community, social and personal services Education Financial intermediation Deprivation: Second quartile Deprivation: Third quartile Deprivation: Fourth quartile London South-East Pakistani Bangladeshi Black Caribbean Black African

-0.040 0.043 -0.016 -0.023 -0.006 -0.017

0.027 0.065 0.009 0.017 0.020 0.007

0.139 0.509 0.075 0.159 0.749 0.015

-0.093 -0.084 -0.034 -0.056 -0.046 -0.031

0.013 0.170 0.002 0.009 0.033 -0.003

-0.021 0.091 0.019 -0.032 0.068 0.003 0.090 0.004 0.080 0.147

0.008 0.044 0.033 0.011 0.021 0.025 0.036 0.021 0.088 0.080

0.006 0.039 0.566 0.004 0.001 0.891 0.013 0.838 0.364 0.066

-0.036 0.005 -0.045 -0.054 0.027 -0.046 0.019 -0.036 -0.093 -0.010

-0.006 0.177 0.082 -0.010 0.108 0.053 0.161 0.044 0.253 0.304

N=139

2 (p-value)=0.000
Notes: 1. 2. Model is estimated using a survey weighted tobit (censored regression) estimator since the dependent variable is censored at 0. Marginal effects measure the effect of a unit change in the explanatory variables on the value of the outcome.

Again, the results for finance gaps relative to the amount of finance sought follow a similar pattern to the previous results for finance gaps. In particular, regarding ethnicity:

Funding gaps are 11 percentage points larger for Pakistani owned businesses relative to Indian owned businesses which sought the same amount of finance (significant at the 5% level).

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This gap is almost 17 percentage points amongst Black African owned businesses (significant at the 5% level).

Table 6.3.3: Determinants of finance gaps (relative to amount of finance sought)1

Marginal effect2 Relationship length (10 years) 2 Finance providers 3 Finance providers 4 Finance providers 5 Finance providers 1 Financial product 2 Financial products 3 Financial products 4 Financial products 5 Financial products 6 Financial products 7 Financial products 8 Financial products Turnover ( m) 1--9 employees 1049 employees 50-249 employees Business age (10 years) Sole trader Ltd Co. Family owned Return on assets Undergraduate education Postgraduate education Financial qualification Business experience Net worth ( m) Female owner -0.018 -0.014 -0.033 -0.005 0.003 -0.011 -0.005 0.045 0.003 0.004 0.014 0.023 -0.084 -0.020 0.009 -0.019 0.005 0.005 0.011 0.012 0.022 0.004 0.013 0.010 0.009 0.002 0.010 0.013 0.052 0.004 0.004 0.004 0.000 0.005 0.004 0.647 0.875 0.011 0.707 0.000 0.699 0.030 0.170 0.074 0.109 0.000 0.025 0.000 -0.027 -0.023 -0.056 -0.028 -0.039 -0.019 -0.030 0.025 -0.014 0.000 -0.006 -0.002 -0.186 -0.029 0.001 -0.026 -0.009 -0.004 -0.011 0.017 0.046 -0.003 0.020 0.066 0.020 0.007 0.034 0.048 0.019 -0.011 0.017 -0.011 0.243 0.122 0.076 0.139 -0.046 0.178 0.092 0.051 0.112 0.010 0.171 0.184 0.132 0.215 0.000 -0.105 -0.058 -0.023 -0.080 -0.065 0.592 0.302 0.176 0.358 -0.026 0.036 0.014 0.064 0.497 -0.017 Std. Error 0.004 0.009 0.033 0.209 0.005 p-value 0.000 0.104 0.052 0.017 0.002 [95% conf. 0.028 -0.003 -0.001 0.087 -0.027 Int.] 0.044 0.031 0.128 0.906 -0.006

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Financial delinquency Construction Wholesale and retail Hotels and restaurants Transport, storage and communications Real estate, renting and business services Health and social work Other community, social and personal services Financial intermediation Deprivation: Second quartile Deprivation: Third quartile Deprivation: Fourth quartile London South-East Pakistani Bangladeshi Black Caribbean Black African

0.022 -0.002 -0.045 0.069 -0.012 -0.044 0.005 -0.008

0.008 0.008 0.005 0.052 0.004 0.007 0.012 0.006

0.007 0.793 0.000 0.184 0.001 0.000 0.642 0.217

0.006 -0.017 -0.055 -0.033 -0.020 -0.057 -0.017 -0.020

0.039 0.013 -0.035 0.170 -0.005 -0.031 0.028 0.005

-0.021 0.033 0.010 -0.027 0.085 0.177 0.110 0.031 0.029 0.167

0.005 0.013 0.020 0.006 0.008 0.086 0.030 0.021 0.020 0.066

0.000 0.013 0.629 0.000 0.000 0.040 0.000 0.137 0.147 0.011

-0.031 0.007 -0.030 -0.040 0.069 0.008 0.052 -0.010 -0.010 0.038

-0.011 0.059 0.050 -0.015 0.101 0.346 0.168 0.073 0.068 0.296

N=139

2 (p-value)=0.000
Notes: 1. 2. Model is estimated using a survey weighted tobit (censored regression) estimator since the dependent variable is censored at 0 and Marginal effects measure the effect of a unit change in the explanatory variables on the value of the outcome.

6.4 Loan margins

The use of multiple finance providers and multiple financial products is associated with lower term loan margins (significant at the 5% level). This

191

suggests there are cost benefits to shopping around for different finance providers. Alternatively the use of multiple providers and products may signal creditworthy borrowers. An increase in turnover by 1m is associated with a fall in loan margins of 0.6 percentage points (significant at the 5% level). Larger firms typically have

greater bargaining power against finance providers which will help them to negotiate a better deal. Sole traders and limited liability companies pay significantly lower loan margins than partnerships (significant at the 5% level). The return to having financially qualified management is a 0.89 percentage point discount on the cost of borrowing (significant at the 10% level). Businesses situated in the second quartile of the distribution of deprived areas pay over 2 percentage points more on loans than businesses located in the most deprived areas (significant at the 5% level). Loan margins are more than 1 percentage point higher for EMBs located in London relative to those amongst EMBs located outside of London and the South-East. Bangladeshi owned businesses pay a 1.5 percentage point premium on their loans this premium is not explained by other observed risk factors and financial relationships (significant at the 5% level).

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Table 6.4.1: Determinants of term loan margins1

Marginal effect2 Relationship length (10 years) 2 Finance providers 3 Finance providers 4 Finance providers 5 Finance providers 1 Financial product 2 Financial products 3 Financial products 4 Financial products 6 Financial products 7 Financial products 8 Financial products Turnover ( m) 1--9 employees 1049 employees 50-249 employees Business age (10 years) Sole trader Ltd Co. Family owned Return on assets Undergraduate education Postgraduate education Financial qualification Business experience Net worth ( m) Female owner Financial delinquency Construction Wholesale and retail Hotels and restaurants -0.049 -0.490 -1.455 -1.202 -2.175 -1.307 -0.996 -1.413 -1.818 -0.558 -1.400 -1.180 -1.936 -0.118 -2.374 -1.468 0.391 0.319 -0.345 0.406 -0.891 -0.238 -0.188 0.538 0.239 -5.087 -0.582 -2.599 Std. Error 0.232 0.328 0.551 0.908 1.024 1.013 1.062 1.210 1.192 0.138 1.080 1.171 1.546 0.254 0.531 0.417 0.704 0.222 0.413 0.327 0.455 0.213 0.181 0.815 0.370 1.282 0.526 0.764 P-value 0.833 0.139 0.010 0.189 0.036 0.200 0.351 0.246 0.131 0.000 0.198 0.317 0.214 0.645 0.000 0.001 0.580 0.154 0.406 0.218 0.054 0.268 0.304 0.511 0.519 0.000 0.272 0.001 [95% conf. -0.510 -1.142 -2.551 -3.006 -4.210 -3.322 -3.108 -3.819 -4.188 -0.833 -3.548 -3.508 -5.009 -0.624 -3.430 -2.298 -1.008 -0.122 -1.166 -0.245 -1.796 -0.662 -0.548 -1.082 -0.496 -7.636 -1.628 -4.119 Int.] 0.412 0.162 -0.359 0.603 -0.140 0.707 1.117 0.994 0.553 -0.284 0.748 1.149 1.137 0.388 -1.319 -0.638 1.790 0.760 0.476 1.056 0.014 0.186 0.173 2.159 0.974 -2.537 0.465 -1.080

193

Transport, storage and communications Real estate, renting and business services Health and social work Other community, social and personal services Education Financial intermediation Deprivation: Second quartile Deprivation: Third quartile Deprivation: Fourth quartile (least deprived) London South-East Pakistani Bangladeshi Black Caribbean Black African Constant N=86

2.310 -0.405 0.800 -

0.950 0.588 0.745 -

0.017 0.494 0.286 -

0.421 -1.575 -0.682 -

4.199 0.765 2.281 -

-1.893 2.194 -0.090 0.375 1.141 -1.035 0.371 1.536 1.334 0.026 8.052

0.989 0.528 0.592 1.022 0.363 0.883 0.413 0.516 0.825 0.404 1.606

0.059 0.000 0.880 0.715 0.002 0.244 0.371 0.004 0.110 0.948 0.000

-3.860 1.145 -1.268 -1.658 0.420 -2.790 -0.449 0.511 -0.307 -0.777 4.859

0.074 3.244 1.088 2.407 1.862 0.719 1.192 2.562 2.974 0.830 11.245

R 2 =0.783
Notes: 1. Model estimated using a survey weighted linear regression estimator. Additional controls for loan amount, loan term and a fixed interest rate dummy were included in this model (estimates not reported). Marginal effects measure the effect of a unit change in the explanatory variables on the value of the outcome.

2.

Turning to overdraft margins it can be seen that:

Having more than one finance provider is associated with an increase in the cost of overdraft borrowing (a premium of 1.3 percentage points; significant at the 5% level).

Older businesses pay lower overdraft margins (there is a 0.7 percentage point discount for each 10 additional years in business; significant at the 5% level). Financial qualifications are associated with a discount on overdraft borrowing (1.2 percentage points; significant at the 10% level).

194

Wealthier owner managers pay lower margins (an additional 1m in personal assets is associated with a discount of 0.4 percentage points; significant at the 10% level).

Businesses situated in less deprived areas pay higher margins relative to those located in the most deprived areas (businesses located in the fourth quartile of least deprived areas pay a premium of 2.4 percentage points relative to the bottom quartile of most deprived areas; significant at the 5% level).

Overdraft margins are 1.4 percentage points higher for EMBs located in London relative to those amongst EMBs located outside of London and the South-East. There is no role for ethnicity in explaining overdraft margins having controlled for standard risk factors and financial relationships.

195

Table 6.4.2: Determinants of overdraft margins1

Marginal effect2 Relationship length (10 years) 2 Finance providers 3 Finance providers 4 Finance providers 5 Finance providers 1 Financial product 2 Financial products 3 Financial products 4 Financial products 6 Financial products 7 Financial products 8 Financial products Turnover ( m) 1--9 employees 1049 employees 50-249 employees Business age (10 years) Sole trader Ltd Co. Family owned Return on assets Undergraduate education Postgraduate education Financial qualification Business experience Net worth ( m) Female owner Financial delinquency Construction Wholesale and retail Hotels and restaurants 0.255 1.335 -0.358 -1.114 0.884 2.100 0.484 0.271 0.124 -1.869 -1.639 -0.192 1.696 1.808 2.646 -0.679 -0.056 0.364 0.228 -0.082 -0.024 -0.294 -1.164 0.240 -0.415 -0.959 -0.385 1.095 0.102 -0.878 Std. Error 0.336 0.522 0.634 1.562 1.602 1.249 1.197 1.139 1.235 1.464 1.451 0.160 0.659 1.053 1.880 0.295 0.601 0.698 0.555 0.094 0.517 0.559 0.655 0.205 0.243 0.627 0.424 1.468 0.775 0.864 P-value 0.449 0.012 0.573 0.477 0.582 0.095 0.687 0.812 0.920 0.204 0.261 0.232 0.011 0.088 0.161 0.023 0.926 0.603 0.682 0.385 0.963 0.599 0.078 0.244 0.091 0.128 0.365 0.457 0.896 0.311 [95% conf. -0.409 0.304 -1.612 -4.201 -2.282 -0.370 -1.883 -1.980 -2.317 -4.764 -4.507 -0.508 0.393 -0.275 -1.070 -1.262 -1.245 -1.017 -0.869 -0.268 -1.047 -1.399 -2.458 -0.165 -0.896 -2.198 -1.224 -1.807 -1.430 -2.587 Int.] 0.919 2.367 0.895 1.974 4.050 4.570 2.851 2.523 2.565 1.026 1.230 0.124 2.999 3.890 6.363 -0.095 1.132 1.745 1.325 0.104 0.999 0.811 0.131 0.645 0.066 0.280 0.453 3.996 1.634 0.830

196

Transport, storage and communications Real estate, renting and business services Health and social work Other community, social and personal services Education Financial intermediation Deprivation: Second quartile Deprivation: Third quartile Deprivation: Fourth quartile (least deprived) London South-East Pakistani Bangladeshi Black Caribbean Black African Constant N=143

-1.707 0.448 -1.131 -3.122

1.258 0.803 1.046 1.117

0.177 0.578 0.281 0.006

-4.193 -1.140 -3.200 -5.331

0.780 2.036 0.937 -0.913

0.711 1.311 0.919 2.424

1.117 0.524 0.867 1.091

0.525 0.013 0.291 0.028

-1.497 0.275 -0.795 0.267

2.920 2.346 2.633 4.580

1.384 -0.614 0.763 0.222 0.542 0.767 0.085

0.416 1.733 0.515 0.581 0.808 0.736 1.483

0.001 0.724 0.141 0.703 0.503 0.299 0.954

0.562 -4.041 -0.255 -0.927 -1.056 -0.687 -2.846

2.206 2.812 1.781 1.371 2.140 2.221 3.016

R 2 =0.579
Notes: 1. Model estimated using a survey weighted Additional linear regression estimator. controls for overdraft amount and a fixed interest rate dummy were included in this model (estimates not reported). Marginal effects measure the effect of a unit change in the explanatory variables on the probability of the outcome occurring.

2.

Summary

This chapter has presented estimates of models of EMB finance outcomes which control for business risk factors and financial relationships. In general these results suggest that risk factors and financial relationships are able to explain differences in finance outcomes across EMBs. However there is evidence that Black African and Pakistani

197

businesses experienced larger finance gaps, and Bangladeshis experienced higher loan margins, than Indian owned businesses after controlling for a wide range of risk factors.

One interpretation of these results is that these groups experienced ethnic discrimination (relative to Indian owned businesses). However, it must be emphasized that other

interpretations are possible. For example, there are high incidences of fast-growing firms amongst Pakistani and Black African businesses (30-33% versus 10-15% amongst White and Indian businesses although these differences are not statistically significant: see Table A2.7). In addition, there is a high demand for equity finance amongst

Pakistani and Black African businesses (around 10% versus around 5% amongst White and Indian businesses although, again this difference is not statistically significant: see Table A4.2). Therefore, one (non-ethnic) explanation for higher finance gaps is that, compared to the Indian businesses, Pakistani and Black African businesses have a greater incidence of high-growth/high-risk firms which are less suitable for debt finance and are better suited to equity finance. 29 Regarding the higher loan margins paid by Bangladeshi businesses relative to Indians, these may be due to collateral or sectoral differences which the model has not been able to capture completely. Last, but not least, it is important to re-emphasize the general point that the current analysis does not have access to exactly the same information which was available to loan officers at the time the lending decisions were made.

29 The data on equity finance is sparse, so the information on the amounts of finance sought/received relates mainly to debt finances. Accordingly, the finance gaps measure predominantly gaps in debt finances. Whether Pakistani and Black African businesses make up for debt gaps with increased amounts of equity finance, or indeed whether they also experience equity gaps, is an unanswered question with these data. A further survey devoted to equity finances would be required to answer these issues.

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Chapter Six: summary of key significant findings Rejection: Financial delinquency increases the probability of rejection by 8.6 percentage points (statistically significant at the 5% level). EMBs located in London are 6.2 percentage points more likely to experience financial rejection than EMBs located outside of London and the South-East (significant at the 10% level). Having controlled for observed risk factors and financial relationships ethnicity plays no role in explaining differences in rejection rates. Discouragement: A 10 percentage point increase in the return on assets diminishes the probability of discouragement by 0.4 percentage points (significant at the 5% level). Financial qualifications increase the likelihood of discouragement by 12 percentage points (significant at the 5% level). An additional 10 years of business experience reduces the likelihood of discouragement by over 5 percentage points (significant at the 10% level). An additional 1m of personal assets reduces the likelihood of discouragement by 6.5 percentage points (significant at the 10% level). Financial delinquency increases the likelihood of discouragement by almost 11 percentage points (significant at the 10% level). EMBs located in London are 8.1 percentage points more likely to feel discouraged than EMBs located outside of London and the South-East (significant at the 10% level). There is no residual role for ethnicity in explaining discouragement having controlled for risk and financial relationships. Finance gaps: Pakistani owned businesses have an average finance gap which is 4,280 bigger than the finance gap for an otherwise similar Indian owned business (significant at the 5% level). Black African businesses experience an average finance gap which is 7,824 larger than that of an otherwise similar Indian owned business (significant at the 10% level). Finance gaps relative to assets: Are 9 percentage points larger for Pakistani owned businesses relative to Indian owned businesses with the same level of assets (significant at the 5% level). And almost 15 percentage points amongst Black African owned businesses (significant at the 10% level). Finance gaps relative to amounts sought: Are 11 percentage points larger for Pakistani owned businesses relative to Indian owned businesses which sought the same amount of finance (significant at the 5% level). And almost 17 percentage points amongst Black African owned businesses (significant at the 5% level). Term loan margins: The use of multiple finance providers and multiple financial products is associated with lower term loan margins (significant at the 5% level). An increase in turnover by 1m is associated with a fall in loan margins of 0.6 percentage points (significant at the 5% level). Sole traders and limited liability companies pay significantly lower loan margins than partnerships (significant at the 5% level). The return to having financially qualified management is a 0.89 percentage point discount on the cost of borrowing (significant at the 10% level). Businesses situated in the second quartile of the distribution of deprived areas pay over 2 percentage points more on loans than businesses located in the most deprived areas (significant at the 5% level). Loan margins are more than 1 percentage point higher for EMBs located in London relative to those amongst EMBs located outside of London and the South-East. Bangladeshi owned businesses pay a 1.5 percentage point premium on their loans relative to Indian owned businesses with the same observed level of risk (significant at the 5% level).

199

Overdraft margins: Having more than one finance provider is associated with an increase in the cost of overdraft borrowing (a premium of 1.3 percentage points; significant at the 5% level). Older businesses pay lower overdraft margins (there is a 0.7 percentage point discount for each 10 additional years in business; significant at the 5% level). Financial qualifications are associated with a discount on overdraft borrowing (1.2 percentage points; significant at the 10% level). Wealthier owner managers pay lower margins (an additional 1m in personal assets is associated with a discount of 0.4 percentage points; significant at the 10% level). Businesses situated in less deprived areas pay higher margins relative to those located in the most deprived areas (businesses located in the fourth quartile of least deprived areas pay a premium of 2.4 percentage points relative to the bottom quartile of most deprived areas; significant at the 5% level). Overdraft margins are 1.4 percentage points higher for EMBs located in London relative to those amongst EMBs located outside of London and the South-East. There is no role for ethnicity in explaining overdraft margins having controlled for standard risk factors and financial relationships.

200

7. Conclusions
Generalisations about the characteristics of EMBs and their experiences in financial markets are highly misleading. Disaggregated comparisons of EMBs and WBs are

necessary due to the wide variation within EMBs in terms of their characteristics and financial outcomes. In regard of business activities, Black businesses are more similar to White than Asian businesses. In particular both Black and White businesses are concentrated in a high value added sector, Real Estate, Renting and Business Services, whereas Asian businesses are concentrated in the highly competitive Wholesale and Retail sector. In other regards (personal assets and track records) Indian owned

businesses are more akin to White than Black businesses. Notably Indian and White business owners are more experienced and tend to be wealthier than business owners from other ethnic groups. The analysis has also shown that Black African business owners have high levels of human capital (academic and financial qualifications) compared with other ethnic groups. Black businesses are also more likely to engage in business planning at start-up than other groups. Economic and social deprivation is a particular issue for businesses in Bangladeshi and Black Caribbean communities. Accordingly, there are many potential non-ethnic based causes which could explain differences in finance outcomes across ethnic groups.

The level of self-reported business problems is higher amongst EMBs than WBs across a range of business operations (production, sales, staffing, finance and red-tape). In particular, the perception of financial problems is particularly acute amongst Black businesses relative to Asian and White businesses. Along with this, levels of selfconfidence in dealing with finances are particularly low amongst Black business owners despite their being more likely to engage in business planning and to hold financial qualifications. The suggestion is that some Black business owners must feel their

problems are very serious indeed.

201

The hard evidence on finances shows that the highest rate of demand for new finance is amongst Black businesses with about two in every three of these businesses seeking new finance. WBs have the lowest rate of demand with about two in every five of these businesses seeking new finance. These differences can be explained by the younger ages of Black businesses. However, Black businesses face a shortfall in finance which is significantly higher than the shortfall amongst Indian businesses with the same level of assets. This shortfall is between 40 and 60 pence per 1 of business assets (for Black Caribbean and Black African owned businesses respectively). In addition, Black owned businesses are up to six times more likely to experience outright rejection than Indian owned businesses, and up to six times more likely to feel discouraged from applying for finance than White businesses. These are big differences.

Analysis of the supply of banking services shows that nine in every ten EMB bank accounts are Big Four banked versus three in every four WBs. In conjunction with this finding, Black businesses are more dissatisfied with their finance provider and pay higher banking charges than Indian and White businesses. Analysis of rates of financial delinquency (missed loan repayments and unauthorized overdraft borrowing) shows that Black businesses have significantly higher rates of delinquency than other groups. This behaviour will result in higher borrowing costs or even the denial of future finance and so may be an important factor in explaining the poorer financial outcomes of Black businesses. Of course, it is possible that financial delinquency is as much a

consequence of poor access to finance as it is a cause of poor access to finance. This issue of causation is one that could be addressed in the future within the context of a longitudinal study tracking the behaviours and finances of the same businesses over time.

The econometric analysis of finance outcomes (rejection, discouragement, finance gaps and loan margins) shows that many of the observed differences in these outcomes (amongst EMBs at least) can be explained by variations in standard risk factors (track records, availability of collateral and financial delinquency) and financial relationships (relationship lengths and exclusivity). However there is a residual role for ethnicity in explaining finance gaps and loan margins. In particular Black African and Pakistani businesses have larger finance gaps (between 4,000 and 8,000) than Indian businesses with the same observed level of risk. Also the loan margins of Bangladeshi

202

owned businesses are 1.5 percentage points higher than those of Indian businesses with the same observed level of risk.

Whilst these unexplained variations may be due to ethnic discrimination the report highlights that the findings are also compatible with alternative non-ethnic based explanations. For example about a third of Black African and Pakistani businesses are high-growth/high-risk firms for which equity finance may be more suitable than debt finance. Whether equity finance makes up for debt shortfalls, or whether these

businesses also experience significant equity gaps, is an issue for future research. In addition, it has not been possible to incorporate WBs into the econometric analysis since the EMB and WB data are in separate, differently weighted, data-sets. The development of an integrated data-set of both EMBs and WBs would be a first step to gaining further insights into variations in financial outcomes across all ethnic groups.

In conclusion, whilst non-ethnic risk factors are able to explain most of the wide variations in financial outcomes amongst EMBs, these variations remain a cause for concern in their own right not least because of their magnitude (in particular regarding financial rejections and discouragement). In addition these variations in outcomes could lead to the perception amongst some ethnic groups that they are being treated unfairly compared with other ethnic groups. In this regard better communications between

finance providers and EMBs may help to remove these perceptions by making the actual criteria by which loans are priced and allocated more transparent. However, in

conjunction with better communications, improved financial support and advice, particularly for Bangladeshi and Black businesses, may be required to tackle some of the underlying causes of poorer financial outcomes head-on.

203

References
Bank of England (2002), Finance for small firms a ninth report. Bank of England (1999), The financing of ethnic minority reports in the United Kingdom: a special report. Competition Commission (2002), The Supply of Banking Services by Clearing Banks to Small and Medium-Sized Enterprises. Cruickshank, D. (2000), Competition in UK Banking. Curran, J. and Blackburn, R. (1993), Ethnic enterprise and the high street bank, Kingston Business School, Kingston University. Graham (2004), Graham Review of the Small Firms Loan Guarantee:

Recommendations. Jones, T., McEvoy, D. and Barrett, G. (1994), Raising capital for the ethnic minority small firm, in A. Hughes and D. Storey (eds) Finance and the Small Firm, 145-181. London and New York: Routledge. Smallbone, D., Ram, M., Deakins, D. and Baldock, R. (2003), Access to finance by ethnic minority businesses in the UK. International Small Business Journal, 21(3), 291314. Fraser, S (2005), Finance for small and medium sized enterprises: a report on the 2004 UK Survey of SME Finances.

204

Appendix A
Tables relating to Chapter Two
Table A2.1 Firm size (employees) Indian
Number of employees 0 1-9 10-49 50-249
Base: All Indian owned businesses=202

Percentage 12.2% 82.2% 4.6% 1.0%

Std. Err. 2.7% 2.8% 0.7% 0.3%

[95% Conf. 7.8% 76.0% 3.4% 0.5%

Interval] 18.6% 87.1% 6.2% 1.8%

Pakistani
Number of employees 0 1-9 10-49 50-249
Base: All Pakistani owned businesses=202

Percentage 10.0% 87.6% 2.2% 0.3%

Std. Err. 2.3% 2.3% 0.4% 0.1%

[95% Conf. 6.3% 82.2% 1.5% 0.1%

Interval] 15.5% 91.5% 3.1% 0.7%

Bangladeshi
Number of employees 0 1-9 10-49
Base: All Bangladeshi owned businesses=103

Percentage 5.1% 90.2% 4.7%

Std. Err. 2.2% 2.7% 1.6%

[95% Conf. 2.1% 83.5% 2.4%

Interval] 11.8% 94.4% 9.0%

Black Caribbean
Number of employees 0 1-9 10-49 50-249
Base: All Black Caribbean owned businesses=203

Percentage 27.4% 69.4% 2.9% 0.3%

Std. Err. 3.3% 3.3% 0.7% 0.2%

[95% Conf. 21.5% 62.5% 1.9% 0.1%

Interval] 34.3% 75.5% 4.5% 1.1%

Black African
Number of employees 0 1-9 10-49 50-249
Base: All Black African owned businesses=200

Percentage 12.2% 84.6% 2.6% 0.6%

Std. Err. 2.5% 2.5% 0.5% 0.2%

[95% Conf. 8.1% 78.9% 1.8% 0.3%

Interval] 18.0% 89.0% 3.9% 1.3%

White
Number of employees 0 1-9 10-49 50-249
Base: All White owned businesses=2,373

Percentage 61.6% 32.1% 5.8% 0.6%

Std. Err. 1.2% 1.1% 0.2% 0.0%

[95% Conf. 59.3% 30.0% 5.4% 0.5%

Interval] 63.9% 34.2% 6.2% 0.6%

Table A2.2 Firms size (average turnover)

Average turnover () Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: All businesses reporting current turnover: Indian=182 Pakistani=144 Bangladeshi=62 Black Caribbean=129 Black African=129 White=2,136

Std. Err.

[95% Conf.

Interval]

688,002.5 628,657.6 342,640.5 164,650.1 200,075.8 434,504.5

171,336.1 190,689.3 87,684.6 32,424.0 27,205.0 41,168.6

349,929.6 251,723.6 167,304.3 100,493.6 146,246.2 353,769.7

1,026,076.0 1,005,592.0 517,976.7 228,806.6 253,905.5 515,239.3

ii

Table A2.3: Business sectors Indian

Sector Manufacturing Construction Wholesale/Retail Hotels and Restaurants Transport, Storage and Communications Real Estate, Renting and Business Services Health and Social Work Other Community, Social and Personal Services Education Financial Intermediation
Base: All Indian owned businesses=202

Percentage 7.4% 2.7% 54.8% 2.7% 4.9% 20.3% 3.7% 2.8% 0.7% -

Std. Err. 2.0% 1.3% 4.0% 1.2% 1.8% 3.3% 1.4% 1.3% 0.7% -

[95% Conf. 3.4% 0.1% 46.9% 0.4% 1.5% 13.9% 1.0% 0.2% -0.7% -

Interval] 11.3% 5.4% 62.7% 5.1% 8.4% 26.8% 6.4% 5.5% 2.0% -

Pakistani
Sector Manufacturing Construction Wholesale/Retail Hotels and Restaurants Transport, Storage and Communications Real Estate, Renting and Business Services Health and Social Work Other Community, Social and Personal Services Education Financial Intermediation
Base: All Pakistani owned businesses=202

Percentage 14.0% 2.5% 47.8% 2.0% 6.0% 19.7% 1.5% 2.4% 1.8% 2.4%

Std. Err. 2.6% 1.2% 3.8% 1.0% 1.8% 3.0% 0.8% 1.2% 1.0% 1.2%

[95% Conf. 8.8% 0.2% 40.3% 0.0% 2.4% 13.8% -0.1% 0.1% -0.2% 0.1%

Interval] 19.2% 4.8% 55.3% 4.0% 9.6% 25.7% 3.2% 4.6% 3.8% 4.6%

iii

Bangladeshi
Sector Manufacturing Construction Wholesale/Retail Hotels and Restaurants Transport, Storage and Communications Real Estate, Renting and Business Services Health and Social Work Other Community, Social and Personal Services Education Financial Intermediation
Base: All Bangladeshi owned businesses=103

Percentage 5.6% 32.5% 25.9% 6.1% 20.8% 1.0% 3.0% 1.0% 4.1%

Std. Err. 2.3% 4.7% 4.4% 2.4% 4.0% 1.0% 1.7% 1.0% 2.0%

[95% Conf. 1.1% 23.2% 17.1% 1.3% 12.8% -1.0% -0.4% -1.0% 0.1%

Interval] 10.1% 41.8% 34.6% 10.9% 28.8% 3.0% 6.5% 3.0% 8.0%

Black Caribbean
Sector Manufacturing Construction Wholesale/Retail Hotels and Restaurants Transport, Storage and Communications Real Estate, Renting and Business Services Health and Social Work Other Community, Social and Personal Services Education Financial Intermediation
Base: All Black Caribbean owned businesses=203

Percentage 14.1% 12.0% 19.9% 5.5% 3.8% 25.7% 3.9% 10.5% 4.0% 0.5%

Std. Err. 2.5% 2.4% 2.9% 1.7% 1.4% 3.2% 1.3% 2.2% 1.4% 0.5%

[95% Conf. 9.2% 7.3% 14.1% 2.2% 1.0% 19.5% 1.3% 6.1% 1.3% -0.5%

Interval] 19.1% 16.7% 25.7% 8.8% 6.5% 32.0% 6.6% 14.9% 6.8% 1.6%

iv

Black African
Sector Manufacturing Construction Wholesale/Retail Hotels and Restaurants Transport, Storage and Communications Real Estate, Renting and Business Services Health and Social Work Other Community, Social and Personal Services Education Financial Intermediation
Base: All Black African owned businesses=200

Percentage 9.6% 0.6% 26.1% 3.0% 10.5% 41.6% 3.2% 1.8% 1.8% 1.7%

Std. Err. 2.2% 0.6% 3.3% 1.3% 2.3% 3.7% 1.3% 1.0% 1.0% 1.0%

[95% Conf. 5.2% -0.6% 19.5% 0.5% 5.9% 34.3% 0.6% -0.1% -0.1% -0.2%

Interval] 13.9% 1.7% 32.6% 5.5% 15.1% 49.0% 5.7% 3.8% 3.8% 3.7%

White
Sector Agriculture Manufacturing Construction Wholesale/Retail Hotels and Restaurants Transport, Storage and Communications Real Estate, Renting and Business Services Health and Social Work Other Community, Social and Personal Services
Base: All White owned businesses=2373

Percentage 3.9% 5.2% 22.1% 15.4% 2.0% 3.7% 36.1% 3.8% 7.8%

Std. Err. 0.4% 0.6% 1.8% 1.2% 0.2% 0.5% 2.1% 0.5% 0.9%

[95% Conf. 3.1% 4.1% 18.6% 13.0% 1.5% 2.7% 31.9% 2.8% 6.1%

Interval] 4.6% 6.4% 25.7% 17.8% 2.5% 4.7% 40.3% 4.8% 9.5%

Table A2.4: Highest academic qualification of owner-manager Indian

Qualification No Academic Qualification O-levels/GCSEs A-levels HND/HNC City and Guilds/NVQ Professional Qualification Undergraduate Degree Postgraduate Degree Diploma/Certificate Apprenticeship/trade qualification Teaching Qualification Other Dont Know
Base: All Indian owned businesses=202

Percentage 8.2% 11.4% 13.8% 5.0% 4.8% 15.5% 19.6% 15.2% 1.4% 0.7% 4.4%

Std. Err. 2.2% 2.6% 2.8% 1.8% 1.8% 2.9% 3.2% 2.9% 1.0% 0.7% 1.6%

[95% Conf. 3.9% 6.3% 8.2% 1.5% 1.3% 9.8% 13.3% 9.5% -0.4% -0.7% 1.2%

Interval] 12.5% 16.5% 19.3% 8.5% 8.2% 21.2% 25.9% 20.9% 3.3% 2.0% 7.7%

Pakistani
Qualification No Academic Qualification O-levels A-levels HND/HNC City and Guilds/NVQ Professional Qualification Undergraduate Degree Postgraduate Degree Diploma/Certificate Apprenticeship/trade qualification Teaching Qualification Other Dont Know
Base: All Pakistani owned businesses=202

Percentage 9.3% 11.4% 8.4% 5.5% 5.4% 10.1% 21.7% 19.2% 3.5% 2.4% 3.1%

Std. Err. 2.2% 2.4% 2.1% 1.7% 1.7% 2.3% 3.1% 3.0% 1.4% 1.2% 1.3%

[95% Conf. 5.0% 6.7% 4.3% 2.1% 2.0% 5.5% 15.5% 13.3% 0.7% 0.1% 0.5%

Interval] 13.6% 16.2% 12.6% 8.9% 8.8% 14.6% 27.9% 25.1% 6.3% 4.6% 5.6%

vi

Bangladeshi
Qualification No Academic Qualification O-levels A-levels HND/HNC City and Guilds/NVQ Professional Qualification Undergraduate Degree Postgraduate Degree Diploma/Certificate Apprenticeship/trade qualification Teaching Qualification Other Dont Know
Base: All Bangladeshi owned businesses=103

Percentage 12.2% 14.7% 9.1% 3.6% 2.6% 6.1% 27.9% 15.8% 2.0% 3.0% 3.0%

Std. Err. 3.3% 3.6% 2.9% 1.8% 1.5% 2.4% 4.5% 3.6% 1.4% 1.7% 1.7%

[95% Conf. 5.6% 7.7% 3.4% 0.0% -0.5% 1.3% 19.0% 8.6% -0.8% -0.4% -0.4%

Interval] 18.7% 21.8% 14.9% 7.2% 5.6% 10.9% 36.8% 22.9% 4.9% 6.5% 6.5%

Black Caribbean
Qualification No Academic Qualification O-levels A-levels HND/HNC City and Guilds/NVQ Professional Qualification Undergraduate Degree Postgraduate Degree Diploma/Certificate Apprenticeship/trade qualification Teaching Qualification Other Dont Know
Base: All Black Caribbean owned businesses=203

Percentage 11.2% 18.0% 8.3% 9.8% 15.3% 7.3% 11.7% 12.0% 1.6% 0.5% 3.2% 1.0%

Std. Err. 2.3% 2.8% 2.0% 2.2% 2.6% 1.9% 2.3% 2.3% 0.9% 0.5% 1.3% 0.6%

[95% Conf. 6.7% 12.5% 4.4% 5.5% 10.2% 3.6% 7.1% 7.4% -0.2% -0.5% 0.7% -0.2%

Interval] 15.7% 23.6% 12.3% 14.1% 20.5% 11.0% 16.3% 16.6% 3.4% 1.6% 5.8% 2.1%

vii

Black African
Qualification No Academic Qualification O-levels A-levels HND/HNC City and Guilds/NVQ Professional Qualification Undergraduate Degree Postgraduate Degree Diploma/Certificate Apprenticeship/trade qualification Teaching Qualification Other Dont Know
Base: All Black African owned businesses=200

Percentage 4.2% 3.6% 2.4% 6.0% 3.6% 15.6% 23.6% 36.5% 2.9% 1.7%

Std. Err. 1.5% 1.4% 1.2% 1.8% 1.4% 2.7% 3.2% 3.6% 1.3% 1.0%

[95% Conf. 1.2% 0.8% 0.1% 2.5% 0.8% 10.2% 17.3% 29.4% 0.4% -0.2%

Interval] 7.1% 6.3% 4.7% 9.5% 6.3% 20.9% 29.9% 43.7% 5.4% 3.7%

White
Qualification No Academic Qualification O-levels A-levels HND/HNC City and Guilds/NVQ Professional Qualification Undergraduate Degree Postgraduate Degree Diploma/Certificate Apprenticeship/trade qualification Teaching Qualification Other Dont Know
Base: All White owned businesses=2373

Percentage 15.2% 13.9% 8.7% 6.3% 13.7% 13.1% 12.4% 9.0% 0.6% 2.0% 0.4% 0.9% 3.8%

Std. Err. 1.4% 1.3% 1.1% 0.9% 1.4% 1.4% 1.4% 1.3% 0.3% 0.8% 0.3% 0.3% 0.7%

[95% Conf. 12.7% 11.6% 6.7% 4.7% 11.2% 10.6% 9.9% 6.7% 0.3% 0.9% 0.1% 0.5% 2.7%

Interval] 18.2% 16.6% 11.2% 8.4% 16.8% 16.1% 15.4% 12.0% 1.4% 4.2% 1.5% 1.6% 5.5%

viii

Table A2.5: Average firm age

Average age (years) Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: All businesses by ethnic group. Indian=202 Pakistani=202 Bangladeshi=103 Black Caribbean=203 Black African=200 White=2,373

Std. Err.

[95% Conf.

Interval]

15.9 8.4 7.1 7.4 5.8 18.5

1.2 0.6 1.1 0.6 0.4 0.5

13.5 7.3 4.9 6.2 5.0 17.7

18.4 9.6 9.3 8.5 6.6 19.4

Indian
Age Start-up (aged<2years) Established Business (aged 2 or more years
Base: All Indian owned businesses=202

Percentage 4.3% 95.7%

Std. Err. 1.6% 1.6%

[95% Conf. 1.0% 92.5%

Interval] 7.5% 99.0%

Pakistani
Age Start-up (aged<2years) Established Business (aged 2 or more years
Base: All Pakistani owned businesses=202

Percentage 16.7% 83.3%

Std. Err. 2.8% 2.8%

[95% Conf. 11.0% 77.7%

Interval] 22.3% 89.0%

Bangladeshi
Age Start-up (aged<2years) Established Business (aged 2 or more years
Base: All Bangladeshi owned businesses=103

Percentage 34.0% 66.0%

Std. Err. 4.8% 4.8%

[95% Conf. 24.5% 56.6%

Interval] 43.4% 75.5%

ix

Black Caribbean
Age Start-up (aged<2years) Established Business (aged 2 or more years
Base: All Black Caribbean owned businesses=203

Percentage 24.3% 75.7%

Std. Err. 3.1% 3.1%

[95% Conf. 18.2% 69.5%

Interval] 30.5% 81.8%

Black African
Age Start-up (aged<2years) Established Business (aged 2 or more years
Base: All Black African owned businesses=200

Percentage 28.8% 71.2%

Std. Err. 3.4% 3.4%

[95% Conf. 22.0% 64.5%

Interval] 35.5% 78.0%

White
Age Start-up (aged<2years) Established Business (aged 2 or more years
Base: All White owned businesses=2,373

Percentage 6.8% 93.2%

Std. Err. 0.9% 0.9%

[95% Conf. 5.0% 91.4%

Interval] 8.6% 95.0%

Table A2.6: Profitability (average return on assets)

Average return on assets Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: All businesses by ethnic group reporting both profit and asset figures: Indian=128 Pakistani=116 Bangladeshi=48 Black Caribbean=68 Black African=79 White=1,574

Std. Err.

[95% Conf.

Interval]

1.1 1.3 0.5 1.6 0.8 1.9

0.2 0.2 0.2 0.3 0.1 0.2

0.8 0.8 0.2 1.0 0.6 1.5

1.5 1.8 0.9 2.2 1.0 2.3

Table A2.7: High growth businesses

Percentage with Turnover Growth of 30% or more per annum Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: All businesses reporting at least 2 years of reported turnover figures: Indian=182 Pakistani=144 Bangladeshi=61 Black Caribbean=127 Black African=127 White=2,073

Std. Err.

[95% Conf.

Interval]

16.9% 30.1% 22.9% 17.9% 33.0% 10.2%

3.2% 4.2% 5.4% 3.5% 4.5% 1.2%

10.5% 21.7% 12.0% 10.9% 24.1% 7.8%

23.2% 38.4% 33.7% 24.8% 41.9% 12.5%

Table A2.8: Legal form of business Indian

Legal form Sole trader Partnership Limited liability partnership Limited liability company
Base: All Indian owned businesses=202

Percentage 35.0% 17.8% 2.5% 44.7%

Std. Err. 3.9% 3.1% 1.2% 4.0%

[95% Conf. 27.8% 12.5% 1.0% 37.0%

Interval] 43.0% 24.7% 6.3% 52.7%

Pakistani
Legal form Sole trader Partnership Limited liability partnership Limited liability company
Base: All Pakistani owned businesses=202

Percentage 25.9% 7.6% 3.1% 63.4%

Std. Err. 3.4% 2.0% 1.3% 3.7%

[95% Conf. 19.8% 4.5% 1.4% 55.9%

Interval] 33.0% 12.5% 7.0% 70.3%

xi

Bangladeshi
Legal form Sole trader Partnership Limited liability partnership Limited liability company
Base: All Bangladeshi owned businesses=103

Percentage 34.0% 6.1% 4.6% 55.4%

Std. Err. 4.8% 2.4% 2.1% 5.0%

[95% Conf. 25.3% 2.7% 1.9% 45.4%

Interval] 43.9% 13.0% 10.9% 64.9%

Black Caribbean
Legal form Sole trader Partnership Limited liability partnership Limited liability company
Base: All Black Caribbean owned businesses=203

Percentage 46.4% 5.3% 2.3% 46.1%

Std. Err. 3.6% 1.6% 1.1% 3.6%

[95% Conf. 39.4% 2.9% 0.9% 39.1%

Interval] 53.6% 9.4% 5.7% 53.2%

Black African
Legal form Sole trader Partnership Limited liability partnership Limited liability company
Base: All Black African owned businesses=200

Percentage 18.7% 3.6% 2.5% 75.2%

Std. Err. 3.0% 1.4% 1.2% 3.3%

[95% Conf. 13.6% 1.6% 1.0% 68.2%

Interval] 25.3% 7.6% 6.1% 81.0%

White
Legal form Sole trader Partnership Limited liability partnership Limited liability company
Base: All White owned businesses=2,373

Percentage 66.2% 9.1% 0.9% 23.9%

Std. Err. 1.5% 0.8% 0.3% 1.4%

[95% Conf. 63.2% 7.7% 0.5% 21.3%

Interval] 69.1% 10.7% 1.6% 26.7%

xii

Table A2.9: Majority family owned businesses

Percentage Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: Partnerships and limited companies by ethnic group: Indian=140 Pakistani=158 Bangladeshi=69 Black Caribbean=116 Black African=166 White=1,600

Std. Err. 3.6% 3.7% 5.8% 4.8% 3.8% 2.1%

[95% Conf. 75.9% 68.5% 54.6% 51.0% 60.9% 72.0%

Interval] 90.3% 83.1% 77.3% 69.8% 76.0% 80.1%

84.4% 76.6% 66.9% 60.8% 69.0% 76.3%

Table A2.10: Majority female owned businesses

Percentage Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: All businesses by ethnic group. Indian=202 Pakistani=202 Bangladeshi=103 Black Caribbean=203 Black African=200 White=2,373

Std. Err. 3.5% 3.3% 3.5% 3.4% 3.5% 1.6%

[95% Conf. 18.7% 18.4% 8.2% 25.5% 24.7% 21.9%

Interval] 32.4% 31.2% 22.1% 38.8% 38.4% 28.1%

24.9% 24.2% 13.7% 31.8% 31.1% 24.9%

Table A2.11: Gender of Principal Owner Indian

Gender Male Female
Base: All Indian owned businesses=202

Percentage 87.7% 12.3%

Std. Err. 2.6% 2.6%

[95% Conf. 82.5% 7.0%

Interval] 93.0% 17.5%

xiii

Pakistani
Gender Male Female
Base: All Pakistani owned businesses=202

Percentage 92.2% 7.8%

Std. Err. 2.0% 2.0%

[95% Conf. 88.2% 3.7%

Interval] 96.3% 11.8%

Bangladeshi
Gender Male Female
Base: All Bangladeshi owned businesses=103

Percentage 97.0% 3.0%

Std. Err. 1.7% 1.7%

[95% Conf. 93.5% -0.4%

Interval] 100.4% 6.5%

Black Caribbean
Gender Male Female
Base: All Black Caribbean owned businesses=203

Percentage 74.7% 25.3%

Std. Err. 3.2% 3.2%

[95% Conf. 68.5% 19.1%

Interval] 80.9% 31.5%

Black African
Gender Male Female
Base: All Black African owned businesses=200

Percentage 85.1% 14.9%

Std. Err. 2.7% 2.7%

[95% Conf. 79.8% 9.6%

Interval] 90.4% 20.2%

White
Gender Male Female
Base: All White owned businesses=2373

Percentage 81.5% 18.5%

Std. Err. 1.5% 1.5%

[95% Conf. 78.6% 15.7%

Interval] 84.3% 21.4%

xiv

Tables relating to Chapter Three

Table A3.1: Main reasons for starting in business Indian
Reason To make money Had a good business idea To be own boss To fulfil a lifes ambition Other
Base: Indian owned businesses aged less than two years: n=8

Percentage 18.1% 16.0% 47.9% 16.0% 2.1%

Std. Err. 15.7% 15.6% 21.0% 15.6% 2.3%

[95% Conf. 1.8% 1.2% 11.2% 1.2% 0.1%

Interval] 73.1% 74.8% 87.1% 74.8% 24.4%

Pakistani
Reason To make money Had a good business idea To be own boss To fulfil a lifes ambition Runs in the family Lack of job opportunities Opportunity presented itself Well qualified in the field Found a market For business growth Other
Base: Pakistani owned businesses aged less than two years: n=31

Percentage 11.0% 21.2% 24.7% 7.1% 3.5% 3.5% 10.6% 7.1% 0.4% 7.1% 3.9%

Std. Err. 5.9% 7.8% 8.2% 4.9% 3.5% 3.5% 5.9% 4.9% 0.4% 4.9% 3.5%

[95% Conf. 3.5% 9.4% 11.7% 1.6% 0.4% 0.4% 3.2% 1.6% 0.0% 1.6% 0.6%

Interval] 29.7% 41.1% 44.7% 25.8% 23.2% 23.2% 29.6% 25.8% 3.2% 25.8% 21.8%

xv

Bangladeshi
Reason To make money Had a good business idea To be own boss To fulfil a lifes ambition Runs in the family Lack of job opportunities Inherited business Frustrated with 9-5 Well qualified in the field Found a market For business growth Other Dont know
Base: Bangladeshi owned businesses aged less than two years: n=34

Percentage 20.9% 11.9% 29.8% 3.0% 6.0% 9.0% 3.0% 1.5% 9.0% 3.0% 3.0%

Std. Err. 7.1% 5.7% 8.0% 3.0% 4.2% 5.0% 3.0% 1.6% 5.0% 3.0% 3.0%

[95% Conf. 9.9% 4.3% 16.3% 0.4% 1.4% 2.7% 0.4% 0.2% 2.7% 0.4% 0.4%

Interval] 38.8% 28.9% 48.1% 20.0% 22.2% 25.5% 20.0% 11.3% 25.5% 20.0% 20.0%

Black Caribbean
Reason To make money Had a good business idea To be own boss To fulfil a lifes ambition Lack of job opportunities Inherited business Frustrated with 9-5 Opportunity presented itself Well qualified in the field Found a market For business growth Other
Base: Black Caribbean owned businesses aged less than two years: n=46

Percentage 8.8% 13.3% 20.5% 22.1% 2.2% 6.6% 2.2% 4.4% 6.6% 2.2% 11.1%

Std. Err. 4.3% 5.1% 6.0% 6.2% 2.2% 3.7% 2.2% 3.1% 3.7% 2.2% 4.7%

[95% Conf. 3.2% 5.9% 10.9% 12.0% 0.3% 2.1% 0.3% 1.1% 2.1% 0.3% 4.5%

Interval] 22.0% 27.2% 35.1% 37.0% 15.1% 19.3% 15.1% 16.8% 19.3% 15.1% 24.6%

xvi

Black African
Reason To make money Had a good business idea To be own boss To fulfil a lifes ambition Runs in the family Lack of job opportunities Inherited business Frustrated with 9-5 Opportunity presented itself Well qualified in the field Found a market For business growth
Base: Black African owned businesses aged less than two years: n=53

Percentage 14.4% 20.5% 14.1% 18.1% 2.4% 8.4% 4.0% 2.0% 4.0% 10.1% 2.0%

Std. Err. 5.0% 5.7% 5.0% 5.5% 2.0% 3.9% 2.8% 2.0% 2.8% 4.3% 2.0%

[95% Conf. 7.0% 11.3% 6.7% 9.5% 0.4% 3.2% 1.0% 0.3% 1.0% 4.1% 0.3%

Interval] 27.5% 34.3% 27.3% 31.8% 12.5% 20.3% 15.3% 13.7% 15.3% 22.5% 13.7%

White
Reason To make money Had a good business idea To be own boss To fulfil a lifes ambition Runs in the family Lack of job opportunities Inherited business Frustrated with 9-5 Opportunity presented itself Other
Base: White owned businesses aged less than two years: n=141

Percentage 13.5% 5.3% 36.7% 18.8% 3.4% 2.7% 5.6% 7.5% 2.4% 4.1%

Std. Err. 3.7% 2.0% 7.0% 5.0% 3.3% 2.7% 3.1% 2.9% 2.0% 3.1%

[95% Conf. 7.7% 2.5% 24.1% 10.9% 0.5% 0.4% 1.8% 3.5% 0.5% 0.9%

Interval] 22.7% 11.1% 51.3% 30.6% 20.8% 17.0% 16.1% 15.6% 11.4% 16.6%

xvii

Table A3.2: Main problems at start-up Indian

Main problem Finding premises Cost of premises Cost of finance Coping with red-tape No problems Dont know
Base: Indian owned businesses aged less than two years: n=8

Percentage 16.0% 16.0% 18.1% 16.0% 18.1% 16.0%

Std. Err. 15.6% 15.6% 15.7% 15.6% 15.7% 15.6%

[95% Conf. 1.2% 1.2% 1.8% 1.2% 1.8% 1.2%

Interval] 74.8% 74.8% 73.1% 74.8% 73.1% 74.8%

Pakistani
Main problem Finding premises Cost of premises Finding sources of finance Cost of finance Finding customers Wage bill Coping with red-tape Competition Lack of advice No problems Dont know
Base: Pakistani owned businesses aged less than two years: n=31

Percentage 10.6% 10.6% 17.6% 24.7% 3.5% 3.9% 17.6% 3.5% 0.8% 7.1%

Std. Err. 5.9% 5.9% 7.3% 8.2% 3.5% 3.5% 7.3% 3.5% 0.6% 4.9%

[95% Conf. 3.2% 3.2% 7.2% 11.7% 0.4% 0.6% 7.2% 0.4% 0.2% 1.6%

Interval] 29.6% 29.6% 37.3% 44.7% 23.2% 21.8% 37.3% 23.2% 3.6% 25.8%

Bangladeshi
Main problem Business planning Cost of premises Finding sources of finance Cost of finance Finding customers Availability of skilled workers Wage bill Coping with red-tape Competition Lack of advice No problems Dont know
Base: Bangladeshi owned businesses aged less than two years: n=34

Percentage 6.0% 3.0% 20.9% 3.0% 14.9% 11.9% 3.0% 6.0% 13.5% 6.0% 9.0% 3.0%

Std. Err. 4.2% 3.0% 7.1% 3.0% 6.2% 5.7% 3.0% 4.2% 5.8% 4.2% 5.0% 3.0%

[95% Conf. 1.4% 0.4% 9.9% 0.4% 6.1% 4.3% 0.4% 1.4% 5.3% 1.4% 2.7% 0.4%

Interval] 22.2% 20.0% 38.8% 20.0% 32.3% 28.9% 20.0% 22.2% 30.2% 22.2% 25.5% 20.0%

xviii

Black Caribbean
Main problem Business planning Finding premises Cost of premises Finding sources of finance Cost of finance Finding customers Availability of skilled workers Coping with red-tape Competition Lack of advice No problems
Base: Black Caribbean owned businesses aged less than two years: n=46

Percentage 6.6% 6.6% 4.4% 35.9% 4.4% 13.3% 4.4% 6.6% 6.6% 4.4% 6.6%

Std. Err. 3.7% 3.7% 3.1% 7.2% 3.1% 5.1% 3.1% 3.7% 3.7% 3.1% 3.7%

[95% Conf. 2.1% 2.1% 1.1% 23.0% 1.1% 5.9% 1.1% 2.1% 2.1% 1.1% 2.1%

Interval] 19.3% 19.3% 16.8% 51.3% 16.8% 27.2% 16.8% 19.3% 19.3% 16.8% 19.3%

Black African
Main problem Business planning Finding premises Cost of premises Finding sources of finance Cost of finance Finding customers Availability of skilled workers Wage bill Coping with red-tape Competition Lack of advice No problems Dont know
Base: Black African owned businesses aged less than two years: n=53

Percentage 2.0% 4.0% 12.1% 32.6% 2.0% 16.4% 2.0% 2.0% 4.0% 8.4% 8.1% 2.4% 4.0%

Std. Err. 2.0% 2.8% 4.7% 6.7% 2.0% 5.3% 2.0% 2.0% 2.8% 3.9% 3.9% 2.0% 2.8%

[95% Conf. 0.3% 1.0% 5.4% 20.8% 0.3% 8.4% 0.3% 0.3% 1.0% 3.2% 3.0% 0.4% 1.0%

Interval] 13.7% 15.3% 24.9% 47.1% 13.7% 29.8% 13.7% 13.7% 15.3% 20.3% 20.1% 12.5% 15.3%

xix

White
Main problem Business planning Finding premises Cost of premises Finding sources of finance Cost of finance Finding customers Availability of skilled workers Wage bill Coping with red-tape Competition Lack of advice No problems Dont know
Base: White owned businesses aged less than two years: n=141

Percentage 3.2% 3.9% 9.4% 10.6% 1.8% 25.9% 5.3% 1.5% 4.7% 3.9% 3.3% 21.2% 5.5%

Std. Err. 2.1% 1.8% 3.6% 3.9% 1.3% 6.9% 2.6% 1.1% 2.4% 1.9% 2.3% 5.4% 3.5%

[95% Conf. 0.9% 1.5% 4.2% 4.9% 0.4% 14.7% 1.9% 0.4% 1.7% 1.5% 0.8% 12.4% 1.5%

Interval] 11.1% 9.3% 19.5% 21.2% 7.4% 41.6% 13.5% 6.3% 12.3% 9.9% 12.4% 33.8% 18.3%

Table A3.3: Extent of current business problems Indian

1 no problem 2 3 4 5 6 7 8 9 10 critical problem Not applicable Dont know
Base: All Indian businesses n=202

Production 43.3% 14.6% 9.7% 2.4% 11.9% 4.2% 0.9% 2.0% 1.4% 2.2% 6.8% 0.7%

Sales 31.3% 6.4% 14.5% 3.2% 16.7% 6.4% 7.2% 3.7% 0.9% 2.0% 7.7% 0.2%

Staffing 28.1% 3.6% 11.7% 10.4% 16.5% 4.3% 5.8% 4.7% 1.4% 13.7%

Finance 41.7% 10.1% 7.2% 6.6% 14.5% 4.3% 3.7% 7.6% 0.7% 0.9% 2.0% 0.8%

Red-tape 37.1% 6.6% 8.1% 7.7% 20.2% 5.9% 3.5% 5.1% 1.5% 3.0% 1.4%

xx

Pakistani
1 no problem 2 3 4 5 6 7 8 9 10 critical problem Not applicable Dont know
Base: All Pakistani businesses n=202

Production 43.0% 12.7% 9.2% 2.6% 18.4% 3.5% 3.5% 1.8% 1.8% 1.2% 1.8% 0.6%

Sales 30.1% 10.3% 13.8% 3.1% 21.4% 4.2% 7.1% 3.6% 1.8% 0.7% 3.9%

Staffing 32.6% 8.3% 7.9% 7.2% 19.5% 5.4% 4.9% 5.3% 2.4% 1.8% 3.5% 1.2%

Finance 33.9% 8.6% 9.7% 6.2% 16.7% 5.3% 6.0% 4.2% 1.8% 3.6% 2.9% 1.2%

Red-tape 31.8% 7.9% 11.6% 4.3% 21.0% 3.1% 4.9% 5.9% 3.5% 3.7% 0.6% 1.8%

Bangladeshi
1 no problem 2 3 4 5 6 7 8 9 10 critical problem Not applicable Dont know
Base: All Bangladeshi businesses n=103

Production 45.7% 12.7% 9.7% 5.6% 13.2% 2.0% 4.1% 2.1% 2.0% 2.0% 1.0%

Sales 42.6% 12.2% 3.0% 5.6% 17.8% 8.6% 3.0% 1.5% 1.0% 3.0% 1.5%

Staffing 39.6% 11.2% 5.1% 5.6% 16.7% 7.1% 4.1% 6.6% 2.0% 2.0%

Finance 28.5% 6.1% 7.1% 10.7% 13.2% 6.1% 3.0% 7.1% 3.0% 11.2% 3.0% 1.0%

Red-tape 32.5% 8.1% 4.6% 8.1% 19.3% 4.6% 2.6% 5.1% 1.0% 12.2% 2.0%

Black Caribbean
1 no problem 2 3 4 5 6 7 8 9 10 critical problem Not applicable Dont know
Base: All Black Caribbean businesses n=203

Production 36.4% 17.1% 14.1% 5.8% 5.5% 5.1% 3.9% 5.0% 1.1% 3.4% 2.2% 0.5%

Sales 20.7% 10.0% 15.1% 9.2% 14.4% 5.4% 6.6% 4.7% 2.2% 5.0% 6.3% 0.5%

Staffing 19.4% 10.2% 7.4% 5.0% 13.5% 6.7% 9.0% 4.6% 2.2% 5.4% 16.1% 0.5%

Finance 18.6% 5.0% 8.2% 3.5% 14.5% 8.2% 9.7% 9.4% 3.2% 15.9% 3.8%

Red-tape 20.7% 9.3% 7.1% 6.9% 15.4% 6.1% 8.6% 10.5% 5.4% 6.3% 2.2% 1.6%

xxi

Black African
1 no problem 2 3 4 5 6 7 8 9 10 critical problem Not applicable Dont know
Base: All Black African businesses n=200

Production 41.1% 15.1% 10.7% 7.8% 6.2% 3.9% 3.0% 4.1% 1.7% 3.5% 1.8% 1.2%

Sales 24.9% 14.9% 6.1% 8.9% 14.9% 7.9% 7.1% 3.6% 3.5% 5.9% 2.4%

Staffing 32.9% 12.3% 6.0% 9.6% 9.2% 6.8% 4.3% 4.8% 2.4% 3.8% 7.5% 0.6%

Finance 14.5% 4.4% 7.3% 5.0% 11.3% 6.4% 6.6% 10.8% 7.0% 23.9% 2.9%

Red-tape 33.0% 6.9% 9.6% 6.7% 13.0% 5.3% 3.9% 7.8% 3.8% 6.0% 1.7% 2.4%

White
1 no problem 2 3 4 5 6 7 8 9 10 critical problem Not applicable Dont know
Base: All White owned businesses n=2,373

Production 55.4% 16.4% 8.3% 2.9% 5.4% 1.4% 2.0% 3.4% 0.9% 1.1% 2.2% 0.7%

Sales 35.3% 11.6% 11.0% 5.7% 13.6% 3.2% 4.2% 3.6% 1.4% 1.9% 8.0% 0.7%

Staffing 19.8% 5.8% 5.7% 3.4% 6.1% 2.1% 3.5% 2.8% 1.0% 1.1% 47.6% 1.1%

Finance 46.8% 11.4% 8.0% 3.2% 10.7% 3.0% 1.8% 3.4% 0.8% 1.3% 9.4% 0.4%

Red-tape 39.8% 8.3% 10.0% 4.9% 14.1% 3.3% 4.5% 5.8% 1.9% 4.7% 2.0% 0.8%

Table A3.4: Main source of advice at start-up Indian

Main source of advice Friends/business associates Bank manager Accountant None Dont Know
Base: Indian owned businesses aged less than two years: n=8

Percentage

Std. Err.

[95% Conf.

Interval]

2.1% 16.0% 16.0% 50.0% 16.0%

2.3% 15.6% 15.6% 21.0% 15.6%

0.1% 1.2% 1.2% 12.1% 1.2%

24.4% 74.8% 74.8% 87.9% 74.8%

xxii

Pakistani
Main source of advice Friends/business associates Bank manager Accountant Business adviser Business Link Local authority None
Base: Pakistani owned businesses aged less than two years: n=31

Percentage

Std. Err.

[95% Conf.

Interval]

35.7% 7.1% 3.9% 3.9% 10.6% 3.5% 35.3%

9.1% 4.9% 3.5% 3.5% 5.9% 3.5% 9.1%

19.8% 1.6% 0.6% 0.6% 3.2% 0.4% 19.5%

55.5% 25.8% 21.8% 21.8% 29.6% 23.2% 55.2%

Bangladeshi
Main source of advice Friends/business associates Bank manager Accountant Business adviser Potential customers Business Link None Dont Know
Base: Bangladeshi owned businesses aged less than two years: n=34

Percentage

Std. Err.

[95% Conf.

Interval]

32.8% 3.0% 7.5% 3.0% 3.0% 3.0% 32.8% 14.9%

8.2% 3.0% 4.4% 3.0% 3.0% 3.0% 8.2% 6.2%

18.6% 0.4% 2.2% 0.4% 0.4% 0.4% 18.6% 6.1%

51.1% 20.0% 22.8% 20.0% 20.0% 20.0% 51.1% 32.3%

Black Caribbean
Main source of advice Friends/business associates Bank manager Accountant Business adviser Princes Trust Jobcentre Plus Business Link Local authority Chamber of Commerce None Dont Know
Base: Black Caribbean owned businesses aged less than two years: n=46

Percentage

Std. Err.

[95% Conf.

Interval]

11.1% 4.4% 2.2% 4.4% 2.2% 2.2% 24.3% 2.2% 11.1% 29.3% 6.6%

4.7% 3.1% 2.2% 3.1% 2.2% 2.2% 6.4% 2.2% 4.7% 6.8% 3.7%

4.5% 1.1% 0.3% 1.1% 0.3% 0.3% 13.7% 0.3% 4.5% 17.6% 2.1%

24.6% 16.8% 15.1% 16.8% 15.1% 15.1% 39.4% 15.1% 24.6% 44.5% 19.3%

xxiii

Black African
Main source of advice Friends/business associates Bank manager Accountant Solicitor Business adviser Business Link Local authority Chamber of Commerce Trade association None
Base: Black African owned businesses aged less than two years: n=53

Percentage

Std. Err.

[95% Conf.

Interval]

22.2% 14.4% 6.0% 10.1% 6.4% 2.0% 2.0% 2.0% 34.9%

5.9% 5.0% 3.4% 4.3% 3.4% 2.0% 2.0% 2.0% 6.8%

12.5% 7.0% 1.9% 4.1% 2.1% 0.3% 0.3% 0.3% 22.8%

36.2% 27.5% 17.7% 22.5% 17.7% 13.7% 13.7% 13.7% 49.4%

White
Main source of advice Friends/business associates Bank manager Accountant Solicitor Business adviser Potential customers Commercial finance broker Jobcentre Plus Business Link Scottish Enterprise Invest Northern Ireland Trade association None Dont Know
Base: White owned businesses aged less than two years: n=141

Percentage

Std. Err.

[95% Conf.

Interval]

9.6% 16.5% 11.4% 1.8% 4.3% 1.6% 0.1% 0.8% 7.2% 3.1% 2.0% 0.8% 39.1% 1.8%

3.5% 6.4% 3.8% 1.3% 2.1% 1.6% 0.1% 0.8% 3.5% 2.7% 1.6% 0.8% 6.7% 1.0%

4.5% 7.4% 5.8% 0.4% 1.6% 0.2% 0.0% 0.1% 2.6% 0.5% 0.4% 0.1% 27.0% 0.6%

19.0% 33.0% 21.3% 7.2% 10.8% 10.9% 0.7% 5.9% 18.1% 15.9% 9.3% 5.3% 52.8% 5.3%

xxiv

Table A3.5: Levels of self-confidence in dealing with current business problems Indian
1 no confidence 2 3 4 5 6 7 8 9 10 complete confidence Not applicable Dont know
Base: Indian sole traders and partnerships n=104

Production 1.2%

Sales

Staffing

Finance 3.7% 1.2% 1.4% 6.1% 10.0% 18.9% 23.4% 9.2% 26.0%

Red-tape 2.6% 1.2% 3.9% 11.5% 11.2% 22.4% 24.3% 5.6% 17.3%

2.6% 1.2% 12.5% 28.0% 21.1% 29.7% 2.5% 1.2%

8.8% 3.7% 19.1% 28.3% 6.6% 24.6% 8.8% 0.2%

7.9% 8.6% 7.9% 22.9% 8.2% 22.5% 22.1%

Pakistani
Production 1 no confidence 2 3 4 5 6 7 8 9 10 complete confidence Not applicable Dont know
Base: Pakistani sole traders and partnerships n=72

Sales

Staffing 1.6% 1.6% 3.2% 9.8% 9.6% 11.2% 18.2% 13.2% 20.2% 11.2%

Finance 3.2% 1.6% 1.6% 13.0% 8.0% 12.9% 21.8% 11.2% 21.8% 1.6% 3.2%

1.6% 6.4% 6.4% 12.9% 23.4% 16.6% 32.7%

1.6% 1.6% 9.8% 4.8% 11.4% 22.7% 9.8% 24.6% 11.8% 1.8%

Red-tape 3.2% 3.2% 1.6% 3.2% 6.4% 6.4% 19.3% 15.7% 10.0% 26.1% 1.6% 3.2%

Bangladeshi
1 no confidence 2 3 4 5 6 7 8 9 10 complete confidence Not applicable Dont know
Base: Bangladeshi sole traders and partnerships n=45

Production 2.3%

Sales 2.3%

Staffing 2.3%

Finance 9.1% 2.3%

Red-tape 9.1%

4.5% 4.5% 6.8% 10.3% 15.9% 55.7%

2.3% 4.5% 2.3% 15.9% 26.2% 11.4% 33.0% 2.3%

4.5% 6.8% 1.2% 9.1% 18.2% 15.9% 31.8% 8.0% 2.3%

19.3% 2.3% 9.1% 6.8% 15.9% 30.7% 2.3% 2.3%

10.3% 6.8% 6.8% 13.6% 15.9% 35.2% 2.3%

xxv

Black Caribbean
Production 1 no confidence 2 3 4 5 6 7 8 9 10 complete confidence Not applicable Dont know
Base: Black Caribbean sole traders and partnerships n=104

Sales

Staffing 1.0%

Finance 1.0% 5.0% 7.0% 15.0% 12.0% 15.2% 15.2% 8.2% 20.5% 1.0%

Red-tape

1.0% 2.0% 5.0% 23.9% 16.0% 51.1% 1.0%

1.0% 2.0% 7.0% 7.0% 15.0% 17.2% 16.0% 27.7% 6.2% 1.0%

2.0% 8.2% 5.0% 11.2% 19.2% 4.0% 18.5% 28.9% 2.0%

1.0% 6.0% 7.0% 3.0% 11.2% 33.4% 6.0% 31.4% 1.0%

Black African
Production 1 no confidence 2 3 4 5 6 7 8 9 10 complete confidence Not applicable Dont know
Base: Black African sole traders and partnerships n=47

Sales 2.3%

Staffing 2.3%

Finance 2.3% 2.3% 2.3% 19.1% 19.1% 11.7% 21.4% 2.7% 14.4% 2.3% 2.3%

Red-tape 2.3%

2.3% 2.3% 2.3% 7.0% 21.0% 17.1% 45.5% 2.3% 2.3% 2.3% 9.7% 9.3% 33.5% 9.3% 28.8% 2.3% 4.7% 7.0% 7.0% 18.7% 19.9% 19.1% 21.4%

9.3% 7.0% 14.4% 21.0% 13.2% 14.0% 16.3% 2.3%

White
1 no confidence 2 3 4 5 6 7 8 9 10 complete confidence Not applicable Dont know
Base: White owned sole traders and partnerships n=1,222

Production 0.1% 0.3% 0.0% 2.3% 1.7% 2.8% 17.2% 17.9% 56.3% 1.3% 0.1%

Sales 0.8% 0.2% 1.2% 0.8% 7.0% 6.5% 8.5% 22.6% 9.6% 33.2% 9.4% 0.3%

Staffing 0.3% 0.3% 0.2% 0.3% 2.7% 2.0% 5.1% 10.5% 5.5% 12.5% 59.1% 1.6%

Finance 1.7% 2.1% 1.1% 1.7% 8.3% 5.1% 10.2% 22.9% 10.1% 31.7% 5.0% 0.1%

Red-tape 3.2% 2.1% 1.1% 3.6% 11.8% 8.0% 12.3% 21.0% 9.5% 24.9% 2.3% 0.4%

xxvi

Table A3.6: Current main source of financial advice Indian

Main source of advice Friends/business associates Bank manager Accountant Solicitor Business adviser Commercial finance broker Business Link Chamber of Commerce Financial advisor Auditors Internet searches None Dont Know
Base: All Indian owned businesses: n=202

Percentage

Std. Err.

[95% Conf.

Interval]

9.5% 21.6% 29.4% 0.1% 1.4% 0.7% 0.7% 0.7% 0.8% 1.4% 29.0% 4.9%

2.4% 3.3% 3.7% 0.1% 1.0% 0.7% 0.7% 0.7% 0.7% 1.0% 3.7% 1.8%

5.7% 15.8% 22.7% 0.0% 0.3% 0.1% 0.1% 0.1% 0.1% 0.3% 22.3% 2.4%

15.2% 28.9% 37.1% 0.6% 5.3% 4.7% 4.7% 4.7% 4.4% 5.3% 36.7% 9.8%

Pakistani
Main source of advice Friends/business associates Bank manager Accountant Solicitor Business adviser Financial advisor Internal sources Internet searches None Dont Know
Base: All Pakistani owned businesses: n=202

Percentage

Std. Err.

[95% Conf.

Interval]

9.5% 20.6% 27.7% 0.6% 3.0% 2.4% 0.1% 0.6% 34.3% 1.2%

2.2% 3.1% 3.4% 0.6% 1.3% 1.2% 0.1% 0.6% 3.6% 0.8%

5.9% 15.2% 21.5% 0.1% 1.3% 0.9% 0.0% 0.1% 27.5% 0.3%

15.0% 27.3% 34.9% 4.1% 6.9% 6.2% 0.5% 4.1% 41.7% 4.6%

xxvii

Bangladeshi
Main source of advice Friends/business associates Bank manager Accountant Business adviser Commercial finance broker Other None Dont Know
Base: All Bangladeshi owned businesses: n=103

Percentage

Std. Err.

[95% Conf.

Interval]

15.2% 22.9% 28.4% 1.0% 1.0% 1.0% 28.5% 2.0%

3.6% 4.2% 4.5% 1.0% 1.0% 1.0% 4.5% 1.4%

9.3% 15.6% 20.4% 0.1% 0.1% 0.1% 20.4% 0.5%

23.9% 32.2% 38.2% 7.1% 7.1% 7.1% 38.1% 7.9%

Black Caribbean
Main source of advice Friends/business associates Bank manager Accountant Solicitor Business adviser Commercial finance broker Business Link Scottish Enterprise Local authority Chamber of Commerce Financial advisor Internal sources Other None Dont Know
Base: All Black Caribbean owned businesses: n=203

Percentage

Std. Err.

[95% Conf.

Interval]

12.3% 16.4% 24.2% 0.5% 3.8% 0.5% 5.9% 0.5% 1.1% 2.3% 1.1% 0.1% 1.6% 28.5% 1.1%

2.4% 2.7% 3.1% 0.5% 1.4% 0.5% 1.7% 0.5% 0.8% 1.1% 0.8% 0.1% 0.9% 3.3% 0.8%

8.3% 11.8% 18.7% 0.1% 1.8% 0.1% 3.3% 0.1% 0.3% 0.9% 0.3% 0.0% 0.5% 22.5% 0.3%

17.8% 22.4% 30.9% 3.8% 7.7% 3.8% 10.4% 3.8% 4.2% 5.7% 4.2% 1.0% 4.9% 35.4% 4.2%

xxviii

Black African
Main source of advice Friends/business associates Bank manager Accountant Solicitor Business adviser Business Link Chamber of Commerce Trade association Financial advisor Auditors Internal sources Internet searches Other None Dont Know
Base: All Black African owned businesses: n=200

Percentage

Std. Err.

[95% Conf.

Interval]

13.4% 18.8% 25.4% 1.7% 4.2% 4.1% 1.2% 0.6% 0.6% 0.6% 0.1% 1.2% 0.6% 27.1% 1.7%

2.6% 2.9% 3.3% 1.0% 1.4% 1.5% 0.8% 0.6% 0.6% 0.6% 0.1% 0.8% 0.6% 3.3% 1.0%

9.1% 13.7% 19.5% 0.6% 2.1% 1.9% 0.3% 0.1% 0.1% 0.1% 0.0% 0.3% 0.1% 21.0% 0.6%

19.4% 25.3% 32.4% 5.3% 8.1% 8.3% 4.6% 4.1% 4.1% 4.1% 0.7% 4.6% 4.1% 34.1% 5.3%

White
Main source of advice Friends/business associates Bank manager Accountant Solicitor Business adviser Commercial finance broker Business Link Scottish Enterprise Chamber of Commerce Trade association Financial advisor Auditors Internal sources Internet searches Govt initiatives Other None Dont Know
Base: All White owned businesses: n=2,373

Percentage

Std. Err.

[95% Conf.

Interval]

5.5% 15.9% 31.3% 0.4% 3.3% 0.7% 0.6% 0.2% 0.0% 0.2% 1.1% 0.2% 0.0% 0.3% 0.0% 0.5% 35.9% 3.9%

0.9% 1.5% 1.8% 0.3% 0.8% 0.5% 0.3% 0.1% 0.0% 0.1% 0.5% 0.1% 0.0% 0.1% 0.0% 0.2% 2.0% 0.8%

4.0% 13.2% 27.8% 0.1% 2.0% 0.2% 0.2% 0.1% 0.0% 0.0% 0.5% 0.1% 0.0% 0.1% 0.0% 0.2% 32.1% 2.6%

7.5% 19.0% 35.0% 1.5% 5.4% 2.6% 1.5% 0.6% 0.2% 0.6% 2.5% 0.6% 0.1% 0.7% 0.1% 1.1% 39.9% 5.7%

xxix

Tables relating to Chapter Four

Table A4.1: Number of financial products used (distribution) Indian
Number of financial products 1 2 3 4 5 6 7 8
Base: All Indian owned businesses=202

Percentage 8.5% 22.5% 20.9% 28.5% 12.1% 5.1% 1.8% 0.7%

Std. Err. 2.3% 3.4% 3.3% 3.7% 2.6% 1.8% 1.0% 0.7%

[95% Conf. 5.0% 16.5% 15.1% 21.9% 7.9% 2.6% 0.6% 0.1%

Interval] 14.2% 29.8% 28.0% 36.2% 18.2% 9.9% 5.2% 4.7%

Pakistani
Number of financial products 0 1 2 3 4 5 6 7
Base: All Pakistani owned businesses=202

Percentage 1.8% 12.6% 23.7% 28.4% 22.3% 6.4% 3.1% 1.9%

Std. Err. 1.0% 2.5% 3.3% 3.4% 3.2% 1.8% 1.3% 1.0%

[95% Conf. 0.6% 8.4% 17.8% 22.2% 16.7% 3.6% 1.3% 0.7%

Interval] 5.4% 18.4% 30.6% 35.6% 29.1% 11.0% 7.0% 5.4%

Bangladeshi
Number of financial products 0 1 2 3 4 5 6
Base: All Bangladeshi owned businesses=103

Percentage 2.0% 13.2% 24.9% 33.5% 20.9% 4.6% 1.0%

Std. Err. 1.4% 3.4% 4.3% 4.7% 4.0% 2.1% 1.0%

[95% Conf. 0.5% 7.7% 17.3% 24.8% 14.0% 1.9% 0.1%

Interval] 7.9% 21.5% 34.4% 43.4% 29.9% 10.9% 7.1%

xxx

Black Caribbean
Number of financial products 0 1 2 3 4 5 6
Base: All Black Caribbean owned businesses=203

Percentage 2.7% 11.4% 28.3% 24.6% 17.9% 12.5% 2.6%

Std. Err. 1.2% 2.3% 3.3% 3.1% 2.8% 2.4% 1.1%

[95% Conf. 1.1% 7.6% 22.3% 19.0% 13.1% 8.5% 1.1%

Interval] 6.3% 16.9% 35.1% 31.3% 24.1% 18.0% 5.9%

Black African
Number of financial products 0 1 2 3 4 5 6 7 8
Base: All Black African owned businesses=200

Percentage 1.7% 20.7% 23.3% 31.5% 12.0% 8.2% 1.8% 0.2% 0.6%

Std. Err. 1.0% 3.1% 3.2% 3.5% 2.4% 2.0% 1.0% 0.1% 0.6%

[95% Conf. 0.6% 15.3% 17.6% 25.0% 8.0% 5.0% 0.6% 0.0% 0.1%

Interval] 5.3% 27.4% 30.2% 38.8% 17.6% 13.2% 5.3% 0.8% 4.1%

White
Number of financial products 0 1 2 3 4 5 6 7 8
Base: All White owned businesses=2,373

Percentage 0.9% 14.8% 21.1% 27.7% 18.3% 10.8% 4.6% 1.4% 0.3%

Std. Err. 0.3% 1.5% 1.7% 1.9% 1.5% 1.1% 0.6% 0.5% 0.1%

[95% Conf. 0.5% 12.1% 18.0% 24.1% 15.6% 8.9% 3.6% 0.7% 0.2%

Interval] 1.8% 18.1% 24.6% 31.6% 21.4% 13.1% 5.8% 2.8% 0.7%

xxxi

Table A4.2: Use of financial products

Percentage CURRENT ACCOUNTS Indian Pakistani Bangladeshi Black Caribbean Black African White DEPOSIT ACCOUNTS Indian Pakistani Bangladeshi Black Caribbean Black African White OVERDRAFTS Indian Pakistani Bangladeshi Black Caribbean Black African White TERM LOANS Indian Pakistani Bangladeshi Black Caribbean Black African White LEASING AND HIRE PURCHASE Indian Pakistani Bangladeshi Black Caribbean Black African White INVOICE FINANCE Indian Pakistani Bangladeshi Black Caribbean Black African White Std. Err. [95% Conf. Interval]

97.1% 95.2% 95.4% 94.6% 96.5% 97.4%

1.4% 1.6% 2.1% 1.7% 1.4% 0.6%

92.9% 90.7% 89.1% 90.3% 92.4% 96.1%

98.9% 97.5% 98.2% 97.1% 98.4% 98.3%

42.4% 23.2% 15.7% 39.0% 29.6% 40.4% 65.4% 63.5% 57.4% 48.9% 42.9% 52.4% 39.1% 33.0% 25.4% 27.5% 19.5% 23.7%

4.0% 3.2% 3.7% 3.5% 3.4% 1.9% 3.9% 3.7% 5.0% 3.6% 3.7% 2.0% 3.9% 3.6% 4.3% 3.3% 3.0% 1.6%

34.8% 17.5% 9.8% 32.3% 23.3% 36.6% 57.5% 56.0% 47.4% 41.8% 35.8% 48.4% 31.7% 26.4% 17.8% 21.5% 14.3% 20.7%

50.4% 30.1% 24.4% 46.2% 36.7% 44.2% 72.5% 70.4% 66.9% 56.0% 50.3% 56.4% 47.0% 40.4% 34.9% 34.3% 26.0% 27.1%

28.1% 20.3% 20.8% 22.2% 18.8% 26.9%

3.6% 3.0% 4.0% 3.0% 2.9% 1.7%

21.6% 14.9% 13.9% 16.9% 13.7% 23.8%

35.7% 26.9% 30.0% 28.7% 25.1% 30.3%

4.9% 6.1% 3.6% 3.6% 2.7% 3.1%

1.7% 1.8% 1.7% 1.3% 1.2% 0.6%

2.5% 3.4% 1.4% 1.8% 1.2% 2.1%

9.4% 10.8% 8.9% 7.4% 6.2% 4.6%

xxxii

CREDIT CARDS Indian Pakistani Bangladeshi Black Caribbean Black African White EQUITY FINANCE Indian Pakistani Bangladeshi Black Caribbean Black African White GRANTS Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: All businesses by ethnic group Indian=202 Pakistani=202 Bangladeshi=103 Black Caribbean=203 Black African=200 White=2,373

54.5% 45.4% 50.8% 40.8% 47.8% 54.8%

4.0% 3.8% 5.0% 3.6% 3.8% 2.0%

46.5% 38.1% 40.9% 34.0% 40.5% 50.8%

62.2% 52.9% 60.5% 48.0% 55.2% 58.7%

2.2% 6.7% 1.5% 1.9% 5.1% 2.4% 5.6% 4.5% 5.1% 12.9% 4.8% 6.5%

1.2% 1.9% 1.1% 1.0% 1.6% 0.5% 1.8% 1.5% 2.2% 2.4% 1.6% 0.7%

0.8% 3.8% 0.4% 0.7% 2.7% 1.7% 2.9% 2.2% 2.1% 8.9% 2.5% 5.3%

6.2% 11.5% 6.5% 5.0% 9.4% 3.5% 10.3% 8.7% 11.8% 18.4% 9.2% 7.9%

xxxiii

Table A4.3 Purposes of credit card expenditures

Percentage BUSINESS CREDIT CARDS Travel and subsitence Indian Pakistani Bangladeshi Black Caribbean Black African White Motor expenses Indian Pakistani Bangladeshi Black Caribbean Black African White Rent and rates Indian Pakistani Bangladeshi Black Caribbean Black African White Utility bills Indian Pakistani Bangladeshi Black Caribbean Black African White Raw materials Indian Pakistani Bangladeshi Black Caribbean Black African White Std. Err. [95% Conf. Interval]

28.3% 34.7% 16.9% 26.2% 15.9% 35.8%

5.8% 6.5% 7.0% 6.1% 4.7% 3.0%

18.3% 23.1% 6.9% 15.8% 8.6% 30.1%

41.1% 48.4% 36.0% 40.0% 27.5% 41.9%

28.1% 28.4% 15.3% 31.7% 8.4% 39.1% No observations 1.9% No observations 4.5% 7.0% 1.6%

5.8% 6.2% 6.6% 6.5% 3.3% 3.1%

18.1% 17.8% 6.0% 20.2% 3.7% 33.1%

40.9% 42.1% 33.7% 45.8% 17.8% 45.3%

1.9% 2.9% 3.3% 0.6%

0.3% 1.3% 2.7% 0.8%

12.7% 15.1% 17.0% 3.3%

7.4% 11.6% 10.2% 12.6% 10.3% 3.5%

3.4% 4.3% 5.6% 4.7% 3.9% 1.0%

2.9% 5.4% 3.1% 5.8% 4.7% 2.0%

17.6% 23.4% 28.5% 25.1% 21.1% 6.1%

45.1% 35.1% 42.4% 53.7% 38.3% 42.6%

6.4% 6.5% 9.1% 7.0% 6.2% 3.1%

32.8% 23.5% 25.5% 39.9% 26.8% 36.7%

57.9% 48.8% 61.2% 67.0% 51.2% 48.8%

xxxiv

Other working capital Indian Pakistani Bangladeshi Black Caribbean Black African White Buying equipment/vehicles Indian Pakistani Bangladeshi Black Caribbean Black African White Other fixed assets Indian Pakistani Bangladeshi Black Caribbean Black African White Sundry expenses Indian Pakistani Bangladeshi Black Caribbean Black African White

7.0% 3.7% 3.4% 11.1% 10.9% 6.1%

3.4% 2.6% 3.4% 4.3% 3.9% 1.8%

2.6% 0.9% 0.4% 4.9% 5.2% 3.5%

17.4% 14.2% 22.4% 23.1% 21.5% 10.6%

14.4% 17.2% 11.9% 13.6% 17.9% 11.2%

4.6% 5.1% 5.9% 4.7% 4.9% 1.7%

7.4% 9.2% 4.1% 6.6% 10.1% 8.2%

26.0% 29.9% 29.7% 26.0% 29.7% 15.1%

1.7% 0.2% 3.4% 4.0% 2.0% 4.2%

1.7% 0.2% 3.4% 2.8% 1.7% 1.3%

0.2% 0.0% 0.4% 1.0% 0.3% 2.3%

11.8% 1.6% 22.4% 15.2% 10.4% 7.6%

27.2% 30.3% 32.2% 28.2% 28.2% 23.9%

5.8% 6.3% 8.6% 6.3% 5.8% 2.5%

17.3% 19.4% 17.5% 17.4% 18.3% 19.3%

40.1% 44.0% 51.6% 42.2% 40.9% 29.1%

PERSONAL CREDIT CARDS Travel and subsitence Indian Pakistani Bangladeshi Black Caribbean Black African White Motor expenses Indian Pakistani Bangladeshi Black Caribbean Black African White

28.7% 23.2% 11.1% 27.5% 33.2% 38.7%

6.8% 7.2% 6.1% 6.7% 6.8% 4.3%

17.2% 11.8% 3.4% 16.2% 21.2% 30.6%

44.0% 40.4% 30.9% 42.8% 48.0% 47.4%

33.0% 20.6% 1.9% 25.3% 15.6% 38.2%

7.1% 6.8% 1.9% 6.5% 5.2% 4.3%

20.6% 10.1% 0.2% 14.4% 7.6% 30.1%

48.4% 37.6% 14.1% 40.5% 29.1% 46.9%

xxxv

Rent and rates Indian Pakistani Bangladeshi Black Caribbean Black African White Utility bills Indian Pakistani Bangladeshi Black Caribbean Black African White Raw materials Indian Pakistani Bangladeshi Black Caribbean Black African White Other working capital Indian Pakistani Bangladeshi Black Caribbean Black African White Buying equipment/vehicles Indian Pakistani Bangladeshi Black Caribbean Black African White Other fixed assets Indian Pakistani Bangladeshi Black Caribbean Black African White

No observations 11.8% No observations 6.7% 8.8% 2.8%

5.4% 3.8% 4.1% 1.1%

4.4% 2.1% 3.4% 1.3%

27.7% 19.6% 21.2% 5.8%

11.5% 17.8% 18.5% 13.5% 18.0% 3.9%

4.9% 6.4% 7.6% 5.2% 5.5% 1.7%

4.7% 8.2% 7.5% 6.0% 9.4% 1.7%

25.3% 34.5% 38.9% 27.6% 31.8% 9.1%

32.7% 34.6% 57.4% 38.8% 55.8% 40.2%

7.1% 8.1% 9.6% 7.4% 7.2% 4.3%

20.3% 20.5% 37.6% 25.3% 41.3% 32.2%

48.2% 52.0% 75.1% 54.2% 69.5% 48.7%

2.6% 5.7% 18.5% 9.0% 9.2% 6.9%

2.3% 4.0% 7.6% 4.3% 4.1% 2.2%

0.4% 1.4% 7.5% 3.3% 3.6% 3.6%

14.3% 21.1% 38.9% 22.3% 21.4% 12.8%

14.1% 9.2% 3.7% 7.3% 21.6% 11.4%

5.3% 4.8% 3.7% 3.8% 6.0% 2.8%

6.4% 3.1% 0.5% 2.5% 11.9% 6.9%

28.2% 24.4% 24.4% 19.8% 35.9% 18.1%

2.3% 6.0% 7.4% No observations 6.4% 5.4%

2.3% 4.0% 5.1% 3.6% 2.2%

0.3% 1.5% 1.7% 2.0% 2.4%

15.4% 20.9% 27.0% 18.5% 11.6%

xxxvi

Sundry expenses Indian Pakistani Bangladeshi Black Caribbean Black African White
Bases: Business credit card purposes: Indian=81 Pakistani=66 Bangladeshi=31 Black Caribbean=58 Black African=73 White=1,107 Personal credit card purposes: Indian=54 Pakistani=43 Bangladeshi=28 Black Caribbean=46 Black African=53 White=468

26.7% 20.6% 11.1% 20.8% 22.3% 23.0%

6.6% 6.8% 6.1% 6.1% 6.0% 3.4%

15.6% 10.1% 3.4% 11.1% 12.5% 17.0%

41.8% 37.6% 30.9% 35.6% 36.5% 30.3%

xxxvii

Table A4.4: Types of new finance sought

Percentage OVERDRAFTS Indian Pakistani Bangladeshi Black Caribbean Black African White TERM LOANS Indian Pakistani Bangladeshi Black Caribbean Black African White LEASING AND HIRE PURCHASE Indian Pakistani Bangladeshi Black Caribbean Black African White INVOICE FINANCE Indian Pakistani Bangladeshi Black Caribbean Black African White EQUITY FINANCE Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: Businesses which sought new finance by ethnic group: Indian=106 Pakistani=128 Bangladeshi=61 Black Caribbean=135 Black African=132 White=1,366

Std. Err.

[95% Conf.

Interval]

30.7% 52.5% 57.8% 54.9% 66.2% 31.9% 51.6% 44.5% 35.1% 41.8% 32.7% 40.6%

5.2% 4.8% 6.5% 4.5% 4.4% 2.7% 5.6% 4.8% 6.2% 4.5% 4.4% 3.0%

21.4% 43.0% 44.7% 46.0% 57.0% 26.9% 40.6% 35.3% 23.9% 33.3% 24.7% 34.9%

41.8% 61.9% 69.9% 63.5% 74.3% 37.3% 62.5% 54.1% 48.3% 50.8% 41.9% 46.5%

41.8% 27.7% 27.2% 23.0% 25.3% 39.9%

5.6% 4.3% 5.8% 3.7% 4.1% 2.9%

31.3% 20.0% 17.2% 16.5% 18.2% 34.5%

53.0% 37.0% 40.2% 31.2% 34.1% 45.7%

5.5% 3.0% 4.4% 4.8% 3.9% 1.9%

2.6% 1.6% 2.6% 1.9% 1.8% 0.5%

2.1% 1.0% 1.3% 2.2% 1.6% 1.1%

13.5% 8.6% 13.7% 10.1% 9.4% 3.0%

4.3% 10.8% 2.7% 2.9% 9.7% 5.8%

2.3% 3.0% 2.0% 1.5% 2.7% 1.1%

1.5% 6.1% 0.6% 1.1% 5.5% 4.0%

11.8% 18.3% 11.1% 7.6% 16.5% 8.3%

xxxviii

Table A4.5 Main sources of start-up finance Indian

Main source of finance Personal savings Loan from a bank/building society/finance company Loan from friends/family Invoice finance
Base: Indian owned startups: n=8

Percentage 32.0%

Std. Err. 19.8%

[95% Conf. 5.2%

Interval] 80.1%

34.0% 18.1% 16.0%

19.8% 15.7% 15.6%

6.0% 1.8% 1.2%

80.6% 73.1% 74.8%

Pakistani
Main source of finance Personal savings Mortgage on home Credit card Loan from a bank/building society/finance company Loan from friends/family Overdraft Other Don't know None
Base: Pakistani owned start-ups: n=31

Percentage 42.7% 10.6% 3.5%

Std. Err. 9.4% 5.9% 3.5%

[95% Conf. 25.4% 3.2% 0.4%

Interval] 62.1% 29.6% 23.2%

7.9% 14.1% 3.5% 7.1% 7.1% 3.5%

4.9% 6.6% 3.5% 4.9% 4.9% 3.5%

2.1% 5.1% 0.4% 1.6% 1.6% 0.4%

25.5% 33.4% 23.2% 25.8% 25.8% 23.2%

xxxix

Bangladeshi
Main source of finance Personal savings Mortgage on home Credit card Gift from friends/family Loan from a bank/building society/finance company Loan from friends/family Invoice finance Other Don't know None
Base: Bangladeshi owned start-ups: n=34

Percentage 47.7% 6.0% 3.0% 3.0%

Std. Err. 8.7% 4.2% 3.0% 3.0%

[95% Conf. 31.0% 1.4% 0.4% 0.4%

Interval] 65.1% 22.2% 20.0% 20.0%

11.9% 17.9% 1.5% 3.0% 6.0%

5.7% 6.7% 1.6% 3.0% 4.2%

4.3% 7.9% 0.2% 0.4% 1.4%

28.9% 35.0% 11.0% 20.0% 22.0%

Black Caribbean
Main source of finance Personal savings Mortgage on home Loan from a bank/building society/finance company Loan from friends/family Grant/subsidized loan from a public authority Other Don't know None
Base: Black Caribbean owned start-ups: n=45

Percentage 62.2% 2.2%

Std. Err. 7.3% 2.2%

[95% Conf. 46.8% 0.3%

Interval] 75.5% 15.0%

11.1% 11.1%

4.7% 4.7%

4.5% 4.5%

24.7% 24.0%

4.4% 4.4% 2.2% 2.2%

3.1% 3.1% 2.2% 2.2%

1.1% 1.1% 0.3% 0.3%

16.0% 16.9% 15.2% 15.0%

xl

Black African
Main source of finance Personal savings Mortgage on home Credit card Gift from friends/family Loan from a bank/building society/finance company Loan from friends/family Grant/subsidized loan from a public authority Other Don't know
Base: Black African owned start-ups: n=45

Percentage 66.8% 4.1% 4.1% 2.1%

Std. Err. 6.8% 2.9% 2.9% 2.1%

[95% Conf. 52.1% 1.0% 1.0% 0.3%

Interval] 78.8% 15.6% 15.0% 14.0%

8.2% 6.2%

4.0% 3.5%

3.0% 1.9%

20.5% 18.0%

6.2% 0.3% 2.1%

3.5% 0.4% 2.1%

1.9% 0.0% 0.3%

18.0% 2.6% 13.0%

White
Main source of finance Personal savings Mortgage on home Credit card Loan from a bank/building society/finance company Loan from friends/family Grant/subsidized loan from a public authority Other Don't know None
Base: White owned startups: n=139

Percentage 65.9% 3.7% 1.4%

Std. Err. 5.9% 2.3% 1.4%

[95% Conf. 53.4% 1.1% 0.2%

Interval] 76.6% 11.8% 9.4%

10.9% 4.3%

3.2% 2.2%

6.0% 1.5%

18.9% 11.5%

1.2% 5.7% 6.2% 0.3%

0.9% 2.2% 3.6% 0.2%

0.3% 2.6% 1.9% 0.1%

5.0% 12.0% 18.2% 1.2%

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Table A4.6: Reasons for loan rejections (overdrafts and term loans)
Percentage Insufficient security Indian Pakistani Bangladeshi Black Caribbean Black African White Poor business credit history Indian Pakistani Bangladeshi Black Caribbean Black African White Poor personal credit history Indian Pakistani Bangladeshi Black Caribbean Black African White No credit history Indian Pakistani Bangladeshi Black Caribbean Black African White No reason given by lender Indian Pakistani Bangladeshi Black Caribbean Black African White Other reasons Indian Pakistani Bangladeshi Black Caribbean Black African White Std. Err. [95% Conf. Interval]

32.5% 8.1% 10.5% 6.5% 16.0% 12.1%

11.9% 5.6% 7.2% 3.2% 4.5% 4.1%

13.5% 1.9% 2.3% 2.4% 8.9% 6.1%

59.9% 29.2% 37.1% 16.7% 26.9% 22.8%

No observations 12.7% 10.5% 10.3% 10.9% 7.2%

6.7% 7.2% 4.0% 3.8% 5.4%

4.0% 2.3% 4.5% 5.3% 1.6%

33.5% 37.1% 21.6% 21.1% 27.4%

No observations 8.1% 5.3% 7.9% 7.6% 4.4%

5.6% 5.3% 3.6% 3.3% 3.1%

1.9% 0.6% 3.1% 3.1% 1.1%

29.2% 33.8% 18.9% 17.3% 16.3%

13.5% 24.9% 31.6% 13.5% 17.0% 6.9%

8.6% 8.8% 11.0% 4.6% 4.6% 2.3%

3.3% 11.2% 13.7% 6.6% 9.6% 3.5%

42.0% 46.5% 57.3% 25.7% 28.2% 13.1%

14.3% 29.0% 26.3% 7.9% 25.6% 18.2%

8.6% 9.2% 10.4% 3.6% 5.3% 4.6%

3.7% 14.0% 10.4% 3.1% 16.5% 10.8%

42.0% 50.5% 52.4% 18.9% 37.5% 29.1%

13.5% 8.6% 10.5% 19.1% 3.0% 6.0%

8.6% 5.6% 7.2% 5.4% 2.1% 2.4%

3.3% 2.1% 2.3% 10.5% 0.7% 2.7%

42.0% 29.0% 37.1% 32.0% 11.7% 12.8%

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Dont know reason Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: Businesses with overdraft and/or term loan rejections by ethnic group: Indian=21 Pakistani=29 Bangladeshi=19 Black Caribbean=59 Black African=75 White=206

12.7% 8.6% 10.5% 11.2% 9.1% 6.7%

8.6% 5.6% 7.2% 4.3% 3.6% 2.6%

2.8% 2.1% 2.3% 5.0% 4.1% 3.1%

42.1% 29.0% 37.1% 23.1% 19.1% 13.8%

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Tables relating to Chapter Five

Table A5.1: Market shares of the main finance providers Indian
Main provider of finance Natwest RBSG Royal Bank of 1 Scotland Barclays HSBC Lloyds TSB Alliance and Leicester Bank of Scotland HBOS The Halifax Abbey National Allied Irish Bank Yorkshire Bank Habib Bank Bank of India The Co-operative Bank Clydesdale Bank Clydesdale Bank Other Don't know
Base: All Indian owned businesses: n=202

Percentage 28.0% 2.3% 26.6% 14.4% 13.0% 2.1% 2.0% 0.7% 1.5% 1.4% 1.4% 1.4% 0.8% 0.8% 0.1% 0.1% 2.2% 1.4%

Std. Err. 3.6% 1.2% 3.6% 2.8% 2.7% 1.2% 1.2% 0.7% 1.0% 1.0% 1.0% 1.0% 0.7% 0.7% 0.1% 0.1% 1.2% 1.0%

[95% Conf. 21.5% 0.8% 20.2% 9.7% 8.6% 0.7% 0.7% 0.1% 0.4% 0.3% 0.3% 0.3% 0.1% 0.1% 0.0% 0.0% 0.8% 0.3%

Interval] 35.6% 6.2% 34.3% 20.9% 19.4% 6.2% 6.2% 4.7% 5.3% 5.3% 5.3% 5.3% 4.4% 4.4% 0.6% 0.6% 6.2% 5.3%

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Pakistani
Main provider of finance Barclays Natwest RBSG Royal Bank of Scotland HSBC Lloyds TSB Habib Bank Bank of Scotland Yorkshire Bank Abbey National Allied Irish Bank Alliance and Leicester Bank of Ireland Clydesdale Bank Other Don't know
Base: All Pakistani owned businesses: n=202

Percentage 27.5% 24.4% 1.4% 18.0% 15.4% 3.5% 2.4% 1.8% 0.7% 0.7% 0.6% 0.6% 0.1% 0.6% 2.4%

Std. Err. 3.4% 3.3% 0.8% 2.9% 2.7% 1.4% 1.2% 1.0% 0.6% 0.6% 0.6% 0.6% 0.1% 0.6% 1.2%

[95% Conf. 21.3% 18.6% 0.4% 13.0% 10.8% 1.6% 0.9% 0.6% 0.1% 0.1% 0.1% 0.1% 0.0% 0.1% 0.9%

Interval] 34.7% 31.5% 4.5% 24.5% 21.6% 7.7% 6.1% 5.4% 3.8% 3.8% 4.1% 4.1% 0.5% 4.1% 6.2%

Bangladeshi
Main provider of finance Barclays Natwest HSBC Lloyds TSB Bank of Scotland Nationwide Don't know
Base: All Bangladeshi owned businesses: n=103

Percentage 31.5% 28.9% 22.8% 11.7% 2.0% 1.0% 2.0%

Std. Err. 4.6% 4.5% 4.2% 3.2% 1.4% 1.0% 1.4%

[95% Conf. 23.1% 20.8% 15.5% 6.7% 0.5% 0.1% 0.5%

Interval] 41.3% 38.7% 32.2% 19.7% 7.9% 7.1% 7.9%

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Black Caribbean
Main provider of finance Lloyds TSB Natwest RBSG Royal Bank of Scotland Barclays HSBC Bank of Scotland HBOS The Halifax Abbey National Nationwide Alliance and Leicester Allied Irish Bank Yorkshire Bank The Co-operative Bank Other Don't know
Base: All Black Caribbean owned businesses: n=203

Percentage 28.0% 21.0% 1.8% 20.5% 17.5% 2.3% 2.2% 1.6% 1.1% 0.5% 0.5% 0.5% 0.3% 0.7% 1.6%

Std. Err. 3.3% 3.0% 0.9% 2.9% 2.8% 1.1% 1.1% 0.9% 0.8% 0.5% 0.5% 0.5% 0.2% 0.6% 0.9%

[95% Conf. 22.0% 15.7% 0.6% 15.3% 12.7% 0.9% 0.8% 0.5% 0.3% 0.1% 0.1% 0.1% 0.1% 0.1% 0.5%

Interval] 34.9% 27.4% 5.0% 26.8% 23.6% 5.7% 5.6% 4.9% 4.2% 3.8% 3.8% 3.8% 1.1% 3.4% 4.9%

Black African
Main provider of finance Barclays Natwest RBSG Royal Bank of Scotland HSBC Lloyds TSB Bank of Scotland HBOS The Halifax Abbey National Alliance and Leicester Nationwide The Co-operative Bank Bank of Ireland Other Don't know
Base: All Black African owned businesses: n=200

Percentage 29.4% 20.9% 2.3% 18.6% 13.0% 5.2% 0.6% 3.0% 0.6% 0.6% 0.6% 0.6% 1.7% 2.3%

Std. Err. 3.4% 3.1% 1.2% 2.9% 2.5% 1.7% 0.6% 1.3% 0.6% 0.6% 0.6% 0.6% 1.0% 1.2%

[95% Conf. 23.1% 15.5% 0.9% 13.5% 8.9% 2.7% 0.1% 1.3% 0.1% 0.1% 0.1% 0.1% 0.6% 0.9%

Interval] 36.6% 27.6% 6.1% 25.0% 18.8% 9.8% 4.1% 6.9% 4.1% 4.1% 4.1% 4.1% 5.3% 6.1%

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Table A5.2 Number of finance providers used (average)

Average number of finance providers Indian Pakistani Bangladeshi Black Caribbean Black African White
Base: All businesses by ethnic group. Indian=202 Pakistani=202 Bangladeshi=103 Black Caribbean=203 Black African=200 White=2,373

Std. Err.

[95% Conf.

Interval]

1.5 1.4 1.4 1.4 1.4 1.5

0.1 0.1 0.1 0.0 0.0 0.0

1.4 1.3 1.3 1.3 1.3 1.5

1.6 1.5 1.5 1.5 1.5 1.6

Number of finance providers used (distribution) Indian

Number of finance providers 1 2 3 4 5
Base: All Indian owned businesses=202

Percentage 61.5% 29.9% 7.2% 0.7% 0.7%

Std. Err. 3.9% 3.7% 2.1% 0.7% 0.7%

[95% Conf. 53.6% 23.2% 4.1% 0.1% 0.1%

Interval] 68.9% 37.6% 12.6% 4.7% 4.7%

Pakistani
Number of finance providers 1 2 3 4 5
Base: All Pakistani owned businesses=202

Percentage 71.1% 19.9% 8.3% 0.1% 0.6%

Std. Err. 3.5% 3.0% 2.1% 0.1% 0.6%

[95% Conf. 63.9% 14.6% 5.0% 0.0% 0.1%

Interval] 77.4% 26.6% 13.5% 0.5% 4.1%

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Bangladeshi
Number of finance providers 1 2 3 4
Base: All Bangladeshi owned businesses=103

Percentage 69.0% 22.4% 8.1% 0.5%

Std. Err. 4.6% 4.1% 2.8% 0.5%

[95% Conf. 59.2% 15.2% 4.1% 0.1%

Interval] 77.3% 31.6% 15.5% 3.8%

Black Caribbean
Number of finance providers 1 2 3
Base: All Black Caribbean owned businesses=203

Percentage 65.1% 29.9% 5.0%

Std. Err. 3.5% 3.3% 1.5%

[95% Conf. 58.1% 23.8% 2.7%

Interval] 71.6% 36.8% 9.0%

Black African
Number of finance providers 1 2 3
Base: All Black African owned businesses=200

Percentage 66.4% 27.1% 6.6%

Std. Err. 3.6% 3.3% 1.9%

[95% Conf. 59.1% 21.0% 3.7%

Interval] 73.0% 34.1% 11.4%

White
Number of finance providers 1 2 3 4 5 6
Base: All White owned businesses=2,373

Percentage 59.3% 31.4% 7.9% 0.9% 0.0% 0.5%

Std. Err. 2.0% 1.9% 1.0% 0.3% 0.0% 0.5%

[95% Conf. 55.4% 27.8% 6.0% 0.6% 0.0% 0.1%

Interval] 63.2% 35.3% 10.2% 1.6% 0.1% 3.3%

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Table A5.3: Satisfaction with main provider of finance

Indian Availability of finance Very satisfied Fairly satisfied Fairly dissatisfied Very dissatisfied Cant say Bank charges Very satisfied Fairly satisfied Fairly dissatisfied Very dissatisfied Cant say Range of services offered Very satisfied Fairly satisfied Fairly dissatisfied Very dissatisfied Cant say Competence of staff Very satisfied Fairly satisfied Fairly dissatisfied Very dissatisfied Cant say Efficiency of service Very satisfied Fairly satisfied Fairly dissatisfied Very dissatisfied Cant say Understanding of your business Very satisfied Fairly satisfied Fairly dissatisfied Very dissatisfied Cant say
Base: All businesses by ethnic group reporting levels of satisfaction with main finance provider. Indian=196 Pakistani=192 Bangladeshi=98 Black Caribbean=193 Black African=194 White=2,325

Pakistani

Bangladesh

Black Caribbean

Black African

White

26.7% 51.5% 8.0% 5.1% 8.8% 13.1% 41.3% 25.4% 16.2% 4.0%

18.4% 49.1% 8.2% 10.6% 13.6% 7.8% 51.3% 20.7% 14.6% 5.6%

20.2% 43.1% 14.9% 11.2% 10.6% 12.8% 46.3% 16.0% 14.4% 10.7%

15.4% 34.4% 13.1% 20.2% 16.9% 10.1% 29.5% 27.0% 23.7% 9.7%

8.5% 28.5% 21.4% 24.3% 17.2% 15.3% 33.1% 24.6% 19.7% 7.2%

34.7% 29.2% 6.9% 4.0% 25.2% 18.2% 43.4% 20.4% 11.1% 7.0%

28.1% 58.5% 8.2% 1.4% 3.9%

17.5% 70.0% 4.3% 5.1% 3.1%

22.3% 59.6% 8.0% 6.4% 3.7%

19.5% 54.9% 8.1% 9.4% 8.1%

20.4% 57.6% 8.0% 7.9% 6.1%

31.8% 51.3% 5.2% 1.7% 10.1%

35.1% 51.9% 8.1% 2.9% 2.1%

33.6% 53.8% 5.2% 6.3% 1.2%

33.5% 54.8% 5.3% 3.7% 2.7%

29.2% 49.2% 10.0% 7.7% 4.0%

38.4% 48.2% 5.0% 7.2% 1.2%

44.8% 43.3% 5.1% 4.2% 2.6%

31.9% 55.5% 7.6% 4.2% 0.7%

30.6% 49.7% 8.9% 8.9% 1.9%

26.1% 56.9% 9.6% 6.4% 1.1%

26.8% 53.3% 10.1% 8.7% 1.1%

36.1% 46.3% 7.9% 7.3% 2.4%

40.5% 46.6% 7.3% 4.5% 1.1%

29.9% 49.8% 9.5% 6.5% 4.4%

21.2% 58.7% 10.1% 5.6% 4.3%

23.4% 52.1% 6.9% 10.1% 7.4%

16.3% 42.1% 19.6% 13.9% 8.1%

28.7% 37.7% 11.6% 17.0% 4.9%

30.8% 40.5% 9.3% 4.6% 14.8%

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Table A5.4: Most frequently used method of communication with main finance provider Indian
Main form of communication Visiting branch By telephone By mail Cash machine Internet No contact Other Dont Know
Base: Indian owned businesses reporting main communication methods=196.

Percentage 43.6% 42.7% 1.5% 0.7% 9.6% 0.8% 0.2% 0.1%

Std. Err. 4.1% 4.1% 1.0% 0.7% 2.3% 0.7% 0.1% 0.1%

[95% Conf. 35.8% 34.9% 0.4% 0.1% 5.9% 0.1% 0.0% 0.0%

Interval] 51.7% 50.8% 5.4% 4.9% 15.3% 4.5% 0.7% 0.7%

Pakistani
Main form of communication Visiting branch By telephone By mail Cash machine Internet No contact Other Dont Know
Base: Pakistani owned businesses reporting main communication methods=192.

Percentage 45.1% 38.2% 2.0% 1.2% 11.5% 0.6% 0.7% 0.6%

Std. Err. 3.9% 3.8% 1.1% 0.9% 2.5% 0.6% 0.6% 0.6%

[95% Conf. 37.6% 31.1% 0.7% 0.3% 7.5% 0.1% 0.1% 0.1%

Interval] 52.8% 45.9% 5.6% 4.9% 17.4% 4.3% 4.0% 4.3%

Bangladeshi
Main form of communication Visiting branch By telephone Cash machine Other
Base: Bangladeshi owned businesses reporting main communication methods=98.

Percentage 59.1% 26.1% 13.8% 1.1%

Std. Err. 5.0% 4.5% 3.6% 1.1%

[95% Conf. 48.8% 18.2% 8.1% 0.1%

Interval] 68.6% 35.9% 22.5% 7.4%

Black Caribbean
Main form of communication Visiting branch By telephone By mail Cash machine Internet Other Dont Know
Base: Black Caribbean owned businesses reporting main communication methods=193

Percentage 44.8% 36.0% 0.6% 3.4% 13.5% 0.6% 1.1%

Std. Err. 3.7% 3.6% 0.6% 1.4% 2.6% 0.6% 0.8%

[95% Conf. 37.6% 29.3% 0.1% 1.5% 9.2% 0.1% 0.3%

Interval] 52.2% 43.3% 4.0% 7.4% 19.4% 4.0% 4.5%

Black African
Main form of communication Visiting branch By telephone By mail Cash machine Internet No contact
Base: Black African owned businesses reporting main communication methods=194.

Percentage 36.8% 39.3% 3.6% 1.8% 17.8% 0.6%

Std. Err. 3.7% 3.7% 1.5% 1.0% 2.9% 0.6%

[95% Conf. 29.9% 32.3% 1.6% 0.6% 12.7% 0.1%

Interval] 44.4% 46.9% 7.8% 5.5% 24.4% 4.2%

White
Main form of communication Visiting branch By telephone By mail Cash machine Internet No contact Other Dont Know
Base: White owned businesses reporting main communication methods=2,325.

Percentage 47.1% 28.5% 5.6% 2.5% 14.9% 0.3% 0.8% 0.2%

Std. Err. 2.1% 1.8% 1.1% 0.7% 1.5% 0.1% 0.4% 0.1%

[95% Conf. 43.0% 25.1% 3.8% 1.4% 12.3% 0.1% 0.3% 0.1%

Interval] 51.1% 32.2% 8.2% 4.4% 18.1% 0.6% 1.9% 0.6%

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Appendix B
Technical Report (by Fiona McAndrew, IFF Research Ltd)
The survey was conducted among 860 small and medium sized ethnic minority businesses (defined as firms with up to 250 employees) in the private sector in the UK. An ethnic minority business was defined as one where the owner or the majority of partners or shareholders in the business were from an ethnic minority. Public sector and not for profit organisations were excluded. The survey fieldwork was conducted by telephone by IFF Research, an independent market research company, at IFFs CATI centre between 5 September and 18 November 2005. In addition to the 860 completed interviews, a further 50 ethnic minority businesses identified in the data for the earlier UK SME Finance survey were added to this new dataset in order to bolster base sizes. This brought the total to 910 enterprises.

Sample profile
Quotas were set by ethnic group. The original intention was to achieve 200 interviews (including the 50 already conducted) in each group, but the low penetration of Bangladeshi businesses made this target very difficult, so only 103 interviews could be achieved with this group. The achieved sample by ethnicity (of owner or majority of partners/shareholders) is shown below.

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Ethnicity Indian Pakistani Bangladeshi Black Caribbean Black African 202 202 103 203 200

Sample
The sample was obtained from two primary sources: Small Business Service the SBS provided details of businesses which were known to be ethnic minority businesses. studies for them. A commercial database (Experian) a national database of all businesses in the UK with a business telephone number. Data on the size (number of employees) and sector (Standard Industrial classification) of businesses is also held enabling sample to be selected by size and sector as well as geography. It was not known in advance whether these businesses would meet the criteria of being ethnic minority businesses. Given the low penetration of these businesses in the population, a purposive approach was taken to the sampling to maximise the cost effectiveness of the study. The sample of businesses for interview was selected from areas and sectors which had a high proportion of ethnic minorities in the population (based on 2001 Census). Additional purposive sample sources were used principally to assist with reaching Bangladeshi businesses. Due to the very low incidence of Bangladeshi owned businesses this was necessary to obtain sufficient interviews with this group with the time and budget available for the project. It was recognised that the use of lists of Bangladeshi businesses compiled by other agencies was not ideal because it was possible that they would not be a representative cross-section of these business. However, almost half the interviews with this group were achieved from the main They had taken part in previous research undertaken by the SBS and agreed at the time to take part in further

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sources and as already noted the use of these more purposive was necessary to complete the project within time and budget.

Approach
The original UK SME Finance survey was conducted using two different approaches. With larger organisations (those with 10 or more employees), a two stage approach was adopted, where a short screening interview was conduct to determine whether the business qualified for the research and met the necessary quota requirements and to identify the person responsible for financial matters. A letter giving further details and a datasheet was then sent to the respondent to assist respondents in collating the necessary financial information, in advance of the main interview. This approach was found not to be essential for smaller businesses (with fewer than 10 employees), whose finances were typically less complex and interviews with these firms were conducted in a single interview which also helped to significantly improve response rates amongst this group. In the event that these small businesses had difficulty answering the questions they were sent the letter and datasheet and called back to complete the interview. Based on the experience of these two approaches, this ethnic minority booster survey was conducted using a one-stage approach only, as given the low incidence of ethnic minority businesses, it was essential to maximise response rates if the project was to be completed within a reasonable time period and budget. The questionnaire was, with the exception of minor alterations to the wording of the introduction, unchanged from that used in the previous survey (UKSMEF) and as such no formal pilot was required, but the initial interviews were closely monitored to ensure the questionnaire and approach worked effectively which was found to be the case and no modification were required. The survey took an average of 20-25 minutes to complete.

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Response rate
The sample outcomes and response rate for the survey are shown on the following page. The figures are based on just those interviews conducted as part of the ethnicity booster, not those 50 cases from the original survey which were merged into the new interviews to form the final dataset. The response rate for the survey was 42%, calculated as the number of complete interviews divided by the sum of complete interviews and refusals.

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Total amount of used sample Ineligible Another company owns 50% or more of firm Business owned by agency of local or national government Business not run for profit or as social enterprise Business has 250+ employees Business is not owned by a member of an ethnic minority Total in scope of study Appointment made for interview with target respondent, but not achieved during fieldwork period Business called several times, but unable to reach target respondent Invalid cases Unobtainable number Out of quota Total in scope of fieldwork Interviews achieved Refusals Response rate (achieved / (achieved + refusals))

21,864 10,862 33 6 32 7 10,784 11,002 46 3,867

3,170 2255 915 2,014 858 1156 42%

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Weighting
The data were weighted by size (no. of employees) within ethnicity, using estimates from the Small Business Service Survey ASBS 2003. Population figures were provided for Indian, Pakistani and Black owned organisations across four size bands. Due to the small number of interviews achieved with businesses with 10+ employees in some ethnic groups, these population figures were combined into two broader size bands: 0 to 9 employees and 10+ employees and these proportions used to weight within the ethnicities. Indian and Pakistani led employers were simply weighted using their own figures, both Black Caribbean and Black African were weighted using figures for Black owned organisations generally. As there was no population data for Bangladeshi businesses, they were weighted using an average of the figures for Pakistani and Indian organisations. Data were not grossed-up to population estimates, as the sample size for each group in ASBS 2003 was not large enough to generate reliable population estimates (although they were adequate for the purposes of weighting). A notable property of this weighting approach is that no attempt has been made to weight the data to reflect the relative size of each ethnic group in the business population, reflecting the desire of SBS to analyse each ethnic group in its own right, rather than grouping together ethnic minority businesses more generally. As such, any overall figures derived from this data are not representative of the ethnic minority led business population as a whole and may under or over represent particular ethnicities. The tables below show the profile of the achieved sample and the derived population profile to which the data was weighted.

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Ethnicity

Size band

Indian Pakistani Bangladeshi Black Caribbean Black African

09 10 + 09 10 + 09 10 + 09 10 + 09 10 +

Unweighted profile (interviews achieved) N % 139 15 63 7 166 18 36 4 94 10 9 1 180 20 23 3 167 18 33 4

Weighted profile % 21 1 22 1 11 1 22 1 21 1

URN 06/2118

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