Information Asymmetry, Small Firm Finance and the Role of Government

One of the most important and commonly quoted constraints upon the survival and ultimate growth of the firm is its ability to raise financial capital. As early as 1931, with the publication of the Macmillan Report, it has been suggested that a 'finance gap' exists for small firms owing to their disadvantaged position in the market for bank finance. It is argued by many that the fundamental cause of this finance gap is the information asymmetry that exists between the provider and the candidate recipient of finance. Arguably, the information asymmetry problem has been exacerbated in recent years by further centralisation in bank lending decisions and the introduction of computerised business credit-scoring.

The aim of this paper is to examine the proposition that informal forms of finance might play a significant role in overcoming both information asymmetry and the finance gap. To achieve this aim, a broad conceptualisation of the various types of non-bank finance (termed ‘quasi-commercial’ (QCOM) finance) is adopted to demonstrate their potential role in addressing these related problems. Through grounding interviews, a model is developed to demonstrate the position of different QCOM providers in the small firm finance market. Finally, the results of a survey to determine the current awareness and use of various forms of finance by small firms are presented. These results suggest
that for many UK firms, a finance gap is not perceived to exist and that the use of non-bank finance remains very limited. Policy recommendations are made on the basis of the findings.