Financing Problems of Small Firms in the Manufacturing Sector: The Australian Case

Jüttner, D. J. P.; Bird, R. G. Article Financing Problems of Small Firms in the Manufacturing Sector: The Australian Case Kredit und Kapital Provided in Cooperation with: Duncker & Humblot, Berlin Suggested Citation: Jüttner, D. J. P.; Bird, R. G. (1976) : Financing Problems of Small Firms in the Manufacturing Sector: The Australian Case, Kredit und Kapital, ISSN 0023-4591, Duncker & Humblot, Berlin, Vol. 9, Iss. 3, pp. 384-415, https://doi.org/10.3790/ccm.9.3.384 This Version is available at: https://hdl.handle.net/10419/292772 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Berichte Financing Problems of Small Firms in the Manufacturing Sector: The Australian Case* I. Introduction and Summary The broad purpose of this study is to investigate the major sources of funds of small firms in the manufacturing sector of the economy and the problems these firms face when attempting to raise finance internally or in the capital market. Not very much is known in Australia about the financial structure of small firms, and what are the specific difficulties, although it is well recognised that they exist. Our knowledge in these areas is based mainly on desk research and characterised by a lack of hard facts. Under these conditions a Government agency like the Small Business Bureau, set up to provide, inter alia, financial assistance to small firms, will find it very difficult to operate. An attempt has been made in this paper to provide some empirical evidence pertaining to the financing of small business. Our main source of information has been a postal questionnaire survey1 sent to a large number of small firms in the manufacturing sector. A summary of our findings is as follows: 1. The main proportion of initial funds was provided by proprietors' equity. Those firms which had to seek outside funds, especially debt finance, found the establishment difficult. 2. Firms successful since their establishment found it easier to obtain the initial funds, thus indicating the ability of the capital market to determine the more promising companies at the time of their establishment. * We acknowledge financial support for this study by the Reserve Bank of Australia. — Thanks is expressed to Mary Rose and Dennis James of the Australian National University for programming assistance. 1 Available upon request by the authors. OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.9.3.384 | Generated on 2023-01-16 13:33:40 Berichte 385 3. A surprisingly high proportion of firms rely solely on equity finance. 4. Recently established companies raise less additional funds from equity, largely because low profits restrict retentions. 5. There is a strong desire to retain more profits, especially among private companies which suffer from the existence of the undistributed profit tax. 6. Small firms draw upon a very restricted range of debt finance. This is particularly true for smaller responding firms which appear unaware of the variety of types of debt finance in existence. 7. The major source of debt finance for small companies is bank overdraft and it appears to be used to finance medium-term investments. Young and less profitable firms use their overdraft facilities more intensely. 8. Although trade credit is the second most important source of debt finance, when considered in relation to trade debt, it becomes a negative source of funds. 9. Equity and debt finance taken together, the sources of major significance are bank overdraft, proprietors' equity, trade credit and retained profits. 10. The most cited reasons why small firms raise funds, in order of importance, are purchase of fixed assets for expansion, increased holdings in current assets and prevention of a liquidity crisis. 11. The majority of firms do not seek outside advice in financial matters. Those which do, typically the smaller firm, approach the external accountant or bank manager. 12. Firms not often refuse funds offered to them, if they do, high interest rates are the main reason. Unavailability of loanable funds, insufficient security and bad credit risk are perceived as the main reasons why funds were refused to firms. 13. Among small firms dissatisfaction with the capital market is widespread and it was more pronounced in the smaller and low profit companies. 14. We could not discern any outcry for Government loans or subsidies, instead recommendations were made aiming at changes in fiscal and monetary policy, better economic management and an improvement in the availability in the existing forms of lending. OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.9.3.384 | Generated on 2023-01-16 13:33:40 386 Berichte II. Methods of Inquiry and Previous Research 1. The Present Study The sample firms were chosen from a list supplied by the Department of Manufacturing Industries (formerly Department of Secondary Industry). This list does not encompass all firms but only those which had correspondence for various reasons with the Department. We sent the questionnaire to 8,848 firms with indicated employment numbers of 100 or less persons. This was our initial operating rule for determining whether a firm is small. On the basis of our initial definition (firms with 100 or less persons) small firms make up the vast majority of businesses in the manufacturing sector. From statistical data referring to establishments it can be seen that they account for 93 per cent of all establishments in this sector; in terms of value added and employment as percentage of the respective totals, the figures are 34 per cent and 38.4 per cent.2 Our definition in numerical terms coincides with the one suggested by the Report of the Committee on Small Business (the "Wiltshire Report"). However it falls short numerically of the statistical criterion of 200 employees suggested by the Report of the Committee of Inquiry on Small Firms (the "Bolton Report"). This difference in definition can probably be justified on the ground of the relative sizes of Australian and British firms. Both above mentioned reports suggested additional factors to discriminate between large and small firms, such as owner management, relatively small market share, and independence in decision making. However, the primary selection criterion in both cases was employment numbers. Although we used employment size as the selection criterion, the secured information enabled us to discriminate between these firms on the basis of such characteristics as independence in decision making, legal status, asset size and profitability, growth in profits, geographical location and age. The questionnaire was sent out in February 1974, and we received the bulk of the answers by mid-April 1974. The end of this month was effectively the closing date. For the interpretation of the collected information we frequently used two-way-tables and applied %2-tests to determine whether differences in 2 Economic Census 68/69, Manufacturing Establishments: Selected Items of Data, ABS, Canberra. OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.9.3.384 | Generated on 2023-01-16 13:33:40 Berichte 387 responses to a particular question were significantly related to differences in responses of another question (e. g. use of overdraft and size of firms). From the answers to the survey we produced 335 tables and our findings in this paper are based upon an analysis of these tables. However, they present only a small proportion of those possible. In the future we inted to expand on the study. 2. Previous Research The capital needs of small firms have been the subject of numerous studies for a long time. The "Report of the Committee on Finance and Industry 1931, HMSO, Cmnd. 3897" (the "Macmillan Report") established that smaller business generally have difficulties in raising longer term capital due to a shortage of these types of funds for smaller companies. Subsequently in the mid 1950's the Oxford Institute of Statistics investigated in a major survey the economic and financial situation of small and medium-sized companies in the manufacturing sector. The results of this survey were published in a series of articles. Recently, the Bolton Report focussed again on the problems these firms face when raising finance. Turning to the Australian scene we have to mention the Wiltshire Report, published in June 1971, a study which was mainly based on desk research supplemented by interviews on a smaller scale. In 1973 a National Small Business Seminar was held in Canberra, organised by the Department of Secondary Industry. Its main purpose consisted in supplying the Government with information to determine the role and function of the National Small Business Bureau which began operating in 1974. Again the seminar papers presented were not mainly based on quantifiable empirical evidence, instead they reflected the informed judgement of experts in this field. III. Characteristics of Responding Firms We received replies from about 2,700 firms, 1,100 of which indicated that their main operations were not in the manufacturing sector. This left us with 1,545 replies from firms which were in the manufacturing sector. We shall refer to these as responding firms (RF). In some cases we calculated percentage figures on the basis of the number of replies to a particular question. We refer to these as responses to a particular question (RQ). The purpose of this section is to provide some general backOPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.9.3.384 | Generated on 2023-01-16 13:33:40 388 Berichte ground information about these firms, and the following general characteristics were examined. 1. Industry Distribution Table 1 Industrial Distribution of Firms Percentage of RF Food, Beverages and Tobacco 9.7 Textiles, Clothing and Footwear 10.3 Wood, Wood Products and Furniture 9.2 Paper, Paper Products, Printing and Publishing 4.6 Chemical, Petroleum and Coal Products 5.1 Glass, Clay & other Non-metallic Products 2.7 Basic Metal Products, includes Pipes and Tubes, Casting & Forging, Smelting & Refining, Rolling, Drawing & Extruding 5.7 Fabricated Metal Products, any non-basic metal products except machinery and equipment 19.9 Transport Equipment 2.1 Other Industrial Machinery and Equipment and Household Appliances 11.5 Leather, Rubber & Plastic Products & Manufacturing N. E. C. (not elsewhere covered) 13.5 2. Size Distribution of Firms a) Employment As already mentioned our primary selection criterion for the sample firms was the number of employed persons (100 or less) within a firm. In calculating this figure for the individual firm we included working proprietors as employed persons and counted part-time employees as a half. Ninety per cent of the responding firms employed less than a hundred persons, while about 66 per cent employed less than 40 persons. There are a number of reasons why we obtained answers from firms exceeding 100 employees. The most obvious one is that the firm has grown in size since the relevant information has been collected by the Department of Secondary Industries. OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.9.3.384 | Generated on 2023-01-16 13:33:40 Berichte 389 Table 2 Distribution of Firms According to Employment Size Employment Firms (RF) Range Absolute °/o No Reply 68 4.40 10 344 22.27 1019 332 21.49 2039 354 22.41 4069 252 16.31 7099 108 6.99 100-149 56 3.62 150 30 1.94 Don't know 1 0.06 b) Value of Assets The book value of the assets of 26 per cent of the responding firms was less than $ 50,000, whereas the assets of a further 31 per cent of firms ranged between $ 50,000 and $ 175,000 and a further ten per cent had assets valued between $ 175,000 and 250,000. The remaining firms had assets exceeding a quarter of a million dollars. Taking the size criterion of employment and value of assets together we found a statistically significant relationship in the sense that the greater the number of employees the greater the value of the assets. c) Distribution of Profits Fifteen per cent of those responding experienced a loss in their last financial year, 45 per cent of the firms reported profits (i. e. taxable income) of less than $ 20,000, while an additional 27 per cent earned profits between $ 20,000 and $ 100,000. Regarding the growth of profits in the past, we found that 68 per cent of the firms had experienced growing profits while only 11 per cent had suffered a profit decline. Firms experiencing growth in profits are also those with high profit levels. Stationary or declining profits are a characteristic of firms with low profits. Since asset size and profit of firms are highly positively related, profit levels are a further measure of size. 25 Kredit und Kapital 3/1976 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.9.3.384 | Generated on 2023-01-16 13:33:40 39C Berichte 3. Legal Status of Firms The outstanding feature regarding the respondents is the fact that 73 per cent were "private companies" for income tax purposes. Of the remainder 10 per cent were partnership, 9 per cent "public companies", 5 per cent sole proprietorships and 1 per cent non profit or co-operative companies. 4. Independent Company or Subsidiary From the replies we found that 80 per cent of the firms were neither a subsidiary nor a branch of another company. This finding is important since it appears that the majority of our respondents in principle possess independence in their decision making pertaining to financial matters of of the firm. Of the remainder, 7 per cent were subsidiaries of Australian companies and 9 per cent were subsidiaries of overseas owned companies. 5. Geographical Distribution The geographical distribution of RF was as follows: Table 3 N. S. W. VIC. QLD. S. A. W. A. TAS. A. C. T. NT. Firms Absolute 604 470 161 102 110 36 0 0 (RF) ®/o 39.09 30.42 10.42 6.60 7.12 2.33 0 0 6. Age Distribution of Firms The results of our survey show that we are dealing mostly with wellestablished firms, since 53 per cent have been in existence for in excess of 20 years, 26 per cent for between 10 and 20 years and 14 per cent for between 5 and 10 years, while only 6 per cent were founded within the previous five years. We found that young firms are also low profit firms. OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.9.3.384 | Generated on 2023-01-16 13:33:40 Berichte 391 IV. The Findings 1. Initial Finance a) Proprietor's Equity is Major Source of Funds By far the major source of initial finance was supplied by capital contributions (equity finance) by the proprietors of the business. Table 4 Sources of Initial Finance Source Funds Used, Most Important Source of Funds Vo of RF "/o of RQ Proprietor's Equity 80 62 Trading Bank Finance 46 22 Proprietor's Debt 24 10 Other Equity 7 3 Other Debt 3 The survey showed (Table 4) that 80 per cent of RF used proprietors' equity in the initial establishment of the business and for 62 per cent of RQ, it constituted the major proportion of the initial finance raised. The only other significant contributions to initial finance were funds supplied by trading banks and debt finance supplied by proprietors. Other debt and equity finance was supplied by holding companies and financial institutions such as Merchant Banks and Finance Companies. The question of whether it was difficult to raise funds was answered in the affirmative by 41 per cent of the sample firms, whereas 49 per cent answered in the negative. The firm which found it difficult to raise initial funds relied more heavily on debt finance, a result which might have been expected.3 The firms which had problems in their establishment were those where proprietors' resources made it necessary to seek larger amount of funds from the capital market. 3 All following results of %2-tests are on the 5 per cent significance level. 25* OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.9.3.384 | Generated on 2023-01-16 13:33:40 398 Berichte is not common knowledge among small firms, since 10 per cent of RF said that it was not economical to take advantage of cash discounts. e) Relative Importance of all Sources of Funds The answers to the question "From all the sources of funds you have indicated as having used when answering previous questions would you list the six most important in terms of the magnitude of funds that each provided" are summarised in the following Table 8. Although proprietors' equity is ranked first by most firms, it becomes apparent from an inspection of other preferences that Trading Bank overdraft is the most important source of funds for Australian small manufacturing firms. A similar picture emerges for the next two most important sources, with retained profits ranked more often as the number one choice, but overall, trade credit appears to be a more important source of funds. However, we have to keep in mind that trade credit is a negative source of funds for RF (Here firms were not asked to consider also the situation with respect to their trade debtors). Of the remaining sources, proprietors' debt finance ranks fifth, followed, with a considerable drop in significance, by term loans from Trading Banks and the Commonwealth Development Bank, leasing from finance companies and intercompany loans. One surprising finding was that asset size and profitability had no relationship with the type of finance which provided the greatest amount of funds within the financial structure of the firms. There was a slight tendency for small (by employment size) and young firms to rely more on proprietors' equity. This does not conflict with our earlier finding that these types of firms use less equity, since it was established that most of this equity was raised via capital contributions of owners. This reliance on proprietors' equity was also discovered for public and private companies. The only characteristic we could find with respect to overdraft was that partnerships and sole traders ranked it first more often. For bigger firms on the basis of employment size, for older companies, independent firms, as well as private and public companies, retained profits turned out to be relatively more important. Finally, trade credit was mentioned as of being the most important source relatively often by private companies, sole proprietors and recently established firms. This is consistent with our previous finding that overall trade credit is less negative for small and younger firms. OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.9.3.384 | Generated on 2023-01-16 13:33:40 Beridite 399 o o £J8 < ON<N<N mvorsmso Hinin q^fivoo <NOOOOOrHOOOOOOOOi ON vO f^O^vOvO ON O^vOONvO O T-I T-< CN O y—* 1—I o •r-j CN lOOOÒOOÒÒÒÒOOOOOÒÒÒÒ CvMMOOOvOtiOO^ <N -ri «O^rSOOvDr-tOOi-HOOiNfO'^-T-iOrOOOOi^T-ic^'^' CN m o-o ZJ& < n n M soONH\0\0(^o\\DnrHvONO m so oo oo \o m VOVOMH rvjcsin t^^os^q^r^tNqcrN oo o r-j o N in o \D csonN NHÒooo^HÒriòddÒHriòòodòodòòòoòooodòòò ^OMJOOOONd'tOOi Srl IT) CS H H <N iCMsO^sOm HHOHNOnNONHOOOOOtnifìH ti o a, O a a 3 O C/5 < Oo ti « O O 2. < vOOOvDHOOsOON^^KmMin OtOOOKOHOvDHOf^vO oo on m vo vq ^ in o o\HHdodvót(NÒòo^o o ^vOMHcotnmmvD som \0 < Hqin^iOrHrHvqq q rtq < cnOOOOÒÒÒÒÒÒÒÓÒOÒÒOOi r^ <N CN o N n rH T-H T-» T-( TH O th 0 ZJS < OOifìHvOvONOKNO\(MnONnsDnoOvOONvO'tvO OO ON O N inOS^^qNrHrHHOH^^HHOrjNNrHqqq ICHHrj ìtddddddddddoHdoodddri NONNnOOHOONt^ n inn ^ vo vo H 00 t-h «ri fSmoomvO ONONOrHyoeiHinvDHfNNN vOsOONinON^S 0N CN <N ^ q ifìN^ONOHNNNoOtOONcO OOnKfO^ vói/ivoodoosd^ddddridrHdddodddrHdd cn (N ITI K ON O • ~ fN fx CN vOvOONinONM t m CTS 00 < m o m OrHoodoodn O^KNriOOOrHOOTf. N OO 0N in rH CO i r^ rtoo m m m o 1 <N <N r* csi th TM m o o ZJZ < »oooooo^- -tifìMmOHNiriTHiOrtiftoorti oom^" oooTt- ^f 't^n T-h (N i^NMNOOONtvOtOONN^n m TH t-H rH N p o C/) T3 O § S o _ 6 2 > i Q pq GpH h-ih „ „ C « « . "a rt rt rt Q o . IH k. U W)« 60 £ 00 § <U do« e C 5 fi e T2 O ci ni .5 t 60 _ 3 8 e S, * y o s. <u 60 60 W) ri £ ss s * s § O d ^ - S s ej! o o «rj'tJ ~E< _ stimili 83 sa sa „ p^pqOO 2 s 2 2 y 2 o^.S.S.S.S.S. ° d ò ó, UCJ(JU< QJ D i) 0) CJ o o o o * G G G G rt rt rt rt g a g g ^ 5 c S ed rt rt siili i-C o <3 3 <8 HH PS H p p p 60 rt O C C G S S^J ^ ¿-6-6-6 HHHH^HUOPHPIHPH^pl.Phc/ÌW^^^SS & G si SH o o UU a> G 60W , rt E a ^ G 2 o O « O^S § o p p co oo co co << > Jh co - o O ti 2 ifl io s o « «3 OpCJ 2 c < < CO PH CO PH p p. O o'3;3'p i i i i i i i i i i i i i i i i i i i : i i i i i i i i i l5incr,crcTOH'1J(U1)<lJtU(L,<U!U<u QQQQQQPQQQQQQPQQQQQQ OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.9.3.384 | Generated on 2023-01-16 13:33:40 400 Berichte 4. Reasons for Raising Finance The questions relating to the reasons why firms sought finance over the last five years were answered as follows: Table 9 Reasons for Raising Finance First most Second most important important reason. reason. Vo of RF ®/o of RF Purchase of fixed assets for expansion purposes 43.3 11.1 Purchase of fixed assets for diversification purposes .. 3.0 9.1 Replacement of existing assets 3.4 12.2 Finance of increased holding in current assets 15.0 13.7 Prevention of a liquidity crisis 12.6 13.8 Other 1.36 0.64 No response 15.4 38.5 Multiple answer 5.8 1.0 The above table demonstrates that the main reasons why firms required more funds was to finance expansion, increased holding of current assets and to prevent a liquidity crisis. Larger sample firms in terms of employment size required funds, as might have been expected, more to finance the acquisition of assets for expansion and the associated increase in holding of current assets. Whereas smaller firms and the low-profit firms tended to be confronted more often with the necessity to obtain funds in order to prevent a liquidity crisis. 5. Specialist Advice a) Half of RF do not Seek Advice of Specialist In a study concerning the problems small firms face when seeking external finance we deemed it necessary to inquire whether outside specialist advice is sought. Fifty per cent of the RF make their major financial decision without the advice of a specialist. The most important factors these firms took into account when making these kinds of OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.9.3.384 | Generated on 2023-01-16 13:33:40 Berichtc 401 decisions were the cost of funds (45 %), general availability of funds (25 °/o) and the financial risk associated with using a particular form of finance (12 °/o). b) External Accountant is Main Advisor A significant proportion of RF, 39 per cent, usually seek specialist advice. They most commonly approached an external accountant (52 °/o) or the bank manager (20 %). An additional 12 per cent approach more than one type of advisor — normally this was both an accountant and a bank manager. An overwhelming majority (88 °/o) of those firms which depended on outside advice said that this resulted in their obtaining funds under favourable terms. c) Typically Smaller RF Seek Advice We found that the smaller firms in terms of employment and the medium-sized firms on the asset basis most commonly seek specialist advice. This also holds true for the low profit firms. This tendency that smaller firms seek outside advice was further substantiated by the evidence which showed that firms in the smaller states in terms of population were more likely to seek advice. This also applied to more recently established firms. It fits into the same picture that public companies which are usually large, do not often seek the advice of an outside specialist. It therefore appears that the firms most in need of advice do seek it, however, it still remains true that a large proportion of these firms never seek advice. d) Advised Firms Draw More on Debt Finance The advised firms draw more on debt finance (overdraft and trade credit) and less on equity finance (proprietors' equity and retained profits). Those firms in need for funds to avoid a liquidity crisis were less likely to turn (or have turned) to outside advisors. 6. Types of and Reasons for Refusing Funds Offered to Firms There are principally two reasons why firms were unsuccessful when seeking to obtain funds of a particular type. One is that the funds were offered but the potential borrower considered the terms unsatisfactory. The second reason is that the lender refused the funds sought. In this section we elaborate on the first part of the issue. OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.9.3.384 | Generated on 2023-01-16 13:33:40 402 Berichte a) Refusing Funds Offered does not Occur Frequently There was a surprisingly large proportion of non-responses to the question seeking the types of finance which firms have been offered but refused. This is a reflection of either the fact that this situation has not arisen so often or that RF were not prepared to answer this question. There are good reasons to believe that the first part of the explanation is quite feasible, in view of the fact that respondents were quite cooperative even when asked questions relating to their asset size and profitability. We have produced evidence that a large proportion of firms never use debt finance (21 °/o of RF), assuming that the described situation only arises in relation to debt finance. Another significant part of the respondents rely only, as we have seen, upon sources of funds which they can hope to be offered on terms usually already known to them (for example, trade credit). The source of funds most commonly refused by RF was Trading Bank overdraft (5 °/o of RF). This might appear surprising, however, it must be remembered that this source of funds is sought by most RF and therefore it only represents a small fraction of those actually seeking it. An additional 2.5 per cent of firms refused other funds offered by Trading Banks (e. g. term loans, leasing). An additional 8 per cent of firms reported to have refused various types of finance offered by finance companies (term loan, leasing, factoring, etc.). b) High Interest Rates are Main Reason for Refusal The most common reason for refusing funds related to high interest rates; 42 per cent of firms (RQs) mentioned this fact. Other reasons given were unwillingness to lodge security (9 °/o), discontent with restrictions required (7%), refusal to give up equity (5 °/o). A further 30 per cent quoted more than one reason for refusing the loan (multiple answer). When asked why they were offered funds on unfavourable terms they replied that they thought the lender had a shortage of loanable funds (27 °/o of RQ) that the lender's usual terms were found to be unattractive (18 °/o of RQ) or that the lender considered the business to be a bad credit risk. Not unexpectedly, the analysis of the answers given by firms as to why they refused funds offered to them, revealed that in the case of OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.9.3.384 | Generated on 2023-01-16 13:33:40 Berichte 403 overdraft loans the security requirements were most important, whereas for finance company loans, the cost of the funds was the discouraging factor. Of the 281 firms which hab refused the loans offered to them, 171 continued to seek the funds from an alternative source and 119 of these firms were eventually successful. 7. Types of and Reasons for Being Refused Funds from a Particular Source In this section we analyse the second reason why firms failed to secure funds, namely the refusal of the lender to provide funds. Again, our analysis of this problem suffers from a low response rate. a) Bank Overdraft Most Often Refused The only source of funds which has been refused to a significant proportion to firms is bank overdraft (11 °/o of RF). The only other ones of any significance at all have been Trading Bank term loans (3 °/o of RF) and Commonwealth Development Bank term loans (1.5 °/o of RF). Again this result is not surprising in view of the fact that overdraft constitutes the major source of debt finance. It is interesting to note that only 2 per cent of firms have been refused funds by finance companies, indicating the willingness of these companies to lend funds. Our previously cited results are evidence, however, that often their terms are considered to be prohibitive. It is worthy of mention that trade credit, the second most important source of funds, appears to be readily available and also acceptable to those who seek it. b) Unavailability of Funds, Insufficient Security and Bad Credit Risk are the Main Reasons As the main reasons, why firms thought that they were refused funds, respondents (RQs) quoted unavailability of funds (22 %), insufficient security (20 °/o), bad credit risk (11 %), and the lender's disapproval of the proposed investment (11 %). When further analysing the characteristics of firms being refused funds we found that they represented a significant proportion of firms which were unable to take advantage of cash discounts because of insufficient funds. OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.9.3.384 | Generated on 2023-01-16 13:33:40 404 Berichte Out of the 281 firms that were refused of loan, 171 continued to seek funds, and 114 of those firms eventually succeeded. The most significant feature of those which continued to seek funds unsuccessfully was that they were recently established firms. Other features of lesser importance were that they were small in employment terms and had lower profits. 8. Organizations Assisting Small Firms When asked whether small firms in the manufacturing sector were aware of the existence of a Government agency (e. g. AIDC) or private bodies (e. g. International Venture Corporation, Paternoster Partners), 53 per cent of RF answered this question in the affirmative, whereas 42 % denied to know about the existence of these agencies or firms. Of the informed firms 41 °/o believed that funds from these sources could have ideally met their financial needs. The existence of the above mentioned agencies and private companies is common knowledge among larger firms, measured on all bases, older companies, and public companies are more aware of these bodies than private companies, partnership and sole traders. 9. Does the Capital Market Cater for the Financial Needs of Small Firms and Possible Government Assistance? Dissatisfaction with Capital Market Widespread In our study we gave the sample firms the opportunity to express their views about how adequately the capital market met their financial needs, and about the assistance the Government might give to alleviate any perceived imperfection of the market. We found that dissatisfied firms outweighed satisfied ones by 2 to 1. The dissatisfied firms had the following characteristics: It is usually a firm small in asset size, with low profits. Furthermore it is a sole proprietorship, a private company or a partnership (ranked in order of dissatisfaction), all of which are much more dissatisfied than public companies. Also the independent firms expressed dissatisfaction with the facilities the capital market offered. Finally, we found that firms in the more distant states, namely Tasmania and Western Australia, expressed discontent while those centred around the financial markets Sydney and Melbourne thought that their financial needs were adequately met. OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.9.3.384 | Generated on 2023-01-16 13:33:40 Berichte 405 When analysing additional characteristics of dissatisfied firms we established that these firms found it also difficult to raise initial finance, that they relied more upon debt finance to raise additional funds; of the additional equity they have raised, relatively more has come from new capital contributions than retained profits, and they would have preferred to retain more profits within the firm. This paints a picture of firms with inadequate internally generated equity funds which were then forced to seek more intensely debt finance in the capital market and are therefore more likely to experience possible imperfections of the capital market. a) No Outcry for Government Assistance The following Table 10 summarises the suggestions of RF in what ways the Government should assist small firms. An interesting general observation following from the answers is that these firms are not simply demanding a scheme of Government loans and subsidies, instead their recommendations aim at changes in fiscal and monetary policy and better economic management as well as at an improvement in the availability of funds from the existing financial institutions. (1) Tax Changes The call for the removal of or lowering the undistributed profit tax was particularly pronounced. We have already seen that the existence of this tax places private companies at an unfair disadvantage. The rationale behind the claim for a reduction in tax on income and profits probably is that firms are then able to supplement their financial needs out of internally generated funds. (2) Monetary and Fiscal Policy Most of the replies to our questionnaire were returned before April 1974, at a time when interest rates were on their way upwards but still significantly below their peak levels which they reached later. Since the Australian economy had enjoyed a low level of interest rates for most of the time in the past it is hardly surprising that the claim for lower interest rates ranks highest on the list of recommendations. 26 Kredit und Kapital 3/1976 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.9.3.384 | Generated on 2023-01-16 13:33:40 406 Berichte Table 10 Suggested Assistance Suggested Assistance (1) Tax Changes Remove or lower undistributed profit tax 20.5 Reduce income/company profit tax 19.3 Remove or lower payroll tax 2.8 Increase Investment allowance 5.5 (2) Monetary and Fiscal Policy Lower interest rates 28.6 Other measures such as preferred exchange rate policy, greater restraints on wage increases etc 3.6 (3) Government Assistance Supply of risk capital by Government agency 15.0 Government guaranteed borrowing 3.6 Grants or subsidies 3.0 Financial advisory service 3.4 Assistance of non-financial kind (marketing, land grants for decentralization) 3.7 Some kind of undefined help 6.3 (4) Greater Availability of Loans More short-medium term 8.8 More long term loan 13.0 More mortgage finance 2.4 (3) Government Assistance The major call for direct Government financial assistance was for the development (or expansion) of a Government agency supplying risk capital to firms on little or no security. Owners felt a need for a service to advise them on where they could seek funds and how they should approach a lender. (4) Greater Availability of Loans The majority of those complaining about the lack of finance did not call for this to be solved through the creation or expansion of any OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.9.3.384 | Generated on 2023-01-16 13:33:40 Berichte 407 Government lending agency, but suggested that the traditional forms of lending should be made more readily available. They saw the greatest need in the expansion of the availability of long-term loans. V. Existing Assistance to Small Firms and Government Policies There are a few avenues open for small businesses to obtain external finance through sources other than the traditional ones where funds are available at market conditions. The following is a list of channels through which small firms might seek special assistance. 1. Commonwealth Development Bank The Commonwealth Development Bank, provides, inter alia, finance for the establishment or development of small industrial undertakings. The lending policy is based on the following principles. Finance provided must not be "available on reasonable and suitable terms and conditions". Generally speaking, it does not compete with other banks (especially trading banks) or other sources of finance. The security aspect of the finance provided is only of secondary importance. Financial assistance may be granted in the form of medium and long term loans. The average loan granted in 1973/74 amounted to $ 32,000. Loans amounted to $ 66.1 million in the financial year 1973/74. Equipment finance is provided in the form of hire purchase or other instalment payment arrangements, like factoring, to help small firms in the manufacturing sector to improve production and productivity. Equipment finance approvals for 1973/74 were $ 41.0 million to 7,885 applicants. Although the working of the Commonwealth Development Bank has a beneficial impact on the situation of small businesses, its importance in quantitative terms is not significant enough. Most importantly, however, the scope of its lending policy is fairly restrictive so that it is not able to contribute anything to alleviate the situation of small businesses which might result from a competitive disadvantage in obtaining finance as compared to larger companies. There exists a very dense net of agents where loan applications may be lodged, since all major trading banks and most State Savings' Banks, which have a nation-wide local branch system, accept or transmit applications. 26* OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.9.3.384 | Generated on 2023-01-16 13:33:40 414 Beridite Résumé Les Problèmes de Financement de la Petite et Moyenne Industrie: Le Cas de L'Australie Le sujet ambitieux de l'article est de dépeindre les principales sources de financement de la petite et moyenne industrie australienne et d'esquisser les problèmes auxquels ces entreprises sont confrontées lorsqu'elles veulent augmenter leur volume de financement par voie interne ou par recours au marché des capitaux. Quoique l'on sache évidemment que ce domaine recèle des difficultés particulières, la structure de financement des petites entreprises demeure largement inconnue. Il est malaisé dans ces conditions pour des services officiels comme le « Small Business Bureau » d'octroyer par exemple des subventions de financement aux petites et moyennes entreprises. L'article tente par conséquent de cerner la connaissance empirique de la situation de financement des petites et moyennes entreprises en Australie. La source principale d'information fut une enquête effectuée au moyen d'un questionnaire"" adressé à un grand nombre de petites et moyennes entreprises industrielles. Le questionnaire a donné les résultats principaux suivants: 1. Le capital initial est essentiellement constitué de capital propre. Les entreprises qui durent faire appel à du capital extérieur, et en particulier à l'endettement, connurent des difficultés de fondation. 2. Les entreprises qui connurent le succès dès leur création furent également celles qui trouvèrent le plus aisément leur capital initial. Ceci souligne la capacité du marché des capitaux d'indentifier les entreprises les plus prometteuses dès le moment de leur création. 3. Une fraction étonnamment importante des entreprises se fie exclusivement à la formation de capital propre. 4. Les entreprises récentes ne cherchent guère à consolider leurs capitaux propres de capitaux externes essentiellement en raison de la faiblesse de la part des bénéfices retenus lorsque ceux-ci sont médiocres. 5. Il n'empêche que les entreprises privées font l'impossible pour conserver leurs bénéfices, en particulier lorsque les gains non distribués sont imposables. 6. Pour le financement par voie du crédit, les petites entreprises jouent un rôle marginal. C'est particulièrement vrai pour les très petites entreprises, non autonomes, qui ignorent la diversité des possibilités d'endettement. 7. La source principale de financement par le crédit des petites entreprises est le dépassement ou le débit du compte bancaire, qui sert apparemment aussi pour les investissements à moyen terme. * Disponible sur simple demande aux auteurs. OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.9.3.384 | Generated on 2023-01-16 13:33:40 Beridite 415 8. L'obtention de crédits d'achats est la deuxième source en importance de financement externe. Si on les compare à l'endettement global dû à l'acquisition de marchandises, cette source de financement apparaît « négative ». 9. Si l'on additionne les financements propres et externes, l'on constate que les principales sources de financement sont dans l'ordre: les débits de comptes bancaires, les dotations en capitaux propres, les crédits d'achats et les bénéfices retenus. 10. Les motifs de constitution d'avoirs monétaires les plus fréquemment cités par les entreprises sont dans l'ordre: l'extension des installations, l'accroissement des placements en valeurs monétaires et la couverture d'impasses de liquidités. 11. La plupart des firmes n'aspirent pas à recevoir des conseils extérieurs en matière de financement. Celles qui ont malgré tout recours àpareille assistance, notamment parmi les plus petites entreprises, s'adressent à leurs experts-comptables ou à leur banque. 12. Les entreprises refusent rarement les offrfes de financement; lorsque cela se produit néanmoins, les taux d'intérêt élevés en sont la cause. En revanche, les restrictions de crédit, l'insuffisance des sûretés et le caractère inacceptable des risques motivent généralement le : rejet des propositions de financement des entreprises. 13. L'on constate fréquemment dans les petites entreprises une insatisfaction à l'égard du marché des capitaux, et plus particulièrement dans les très modestes firmes et dans celles dont les bénéfices sont réduits. 14. L'on n'a pas pu établir d'attirance particulière pour des crédits de l'Etat ou pour des subventions. L'on préfère être conseillé sur les moyens de réaliser l'objet de l'entreprise, sur les modifications à apporter à la politique financière et monétaire, sur l'amélioration de la gestion et sur l'optimalisation de l'exploitation des possibilités existantes de crédit. OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.9.3.384 | Generated on 2023-01-16 13:33:40