By Daniel Hunter

A business bank providing a flow of patient capital to high-growth potential small to medium sized enterprises (SMEs) could help businesses succeed, according to new research.

The internationally acclaimed* research, conducted by the University of Surrey and based on responses from over 1,000 business leaders nationwide, including 20 in-depth interviews and 13 focus groups, represents one of the largest surveys into the strategic management of SMEs in the UK.

“We found that SMEs mostly borrow from family or friends or re-invest retained profits, but these sources are often inadequate for the growth needs of businesses,” explains study director, Professor David Gray.

“Our research shows that banks come a poor third in terms of finance sources — which is disappointing given that the UK is considered to be a market economy. SMEs need 'patient' capital, finance that is there for the longer term. This is the only way to stimulate and sustain high-growth businesses.”

The findings of the research, commissioned by top 20 chartered accountancy firm Kingston Smith LLP, come just weeks after Government proposals were announced to launch a British business bank to help support SMEs and kick-start much needed economic growth, details of which are anticipated in the Autumn Statement.

Sir Michael Snyder, Senior Partner of Kingston Smith, who commissioned the research, comments: “This research validates our experience, which shows that what SMEs really need is long-term funding to close the equity gap. We hope the Government will take this opportunity to throw high-growth potential SMEs the lifeline they need by providing them with a guaranteed level of core working capital finance with which to develop and flourish.” He adds: “This would also reduce the risk profile of lending to SMEs which would, in turn, incentivise banks to lend and unlock new sources of SME financing.”

The findings also shows that the majority of SMEs (58%) used just one source of finance to start their business, while fewer SMEs (42%) rely on only one source of finance to sustain their business. Professor Mark Saunders comments: “It is interesting to note that, although more sources of finance are used by SMEs to sustain their business than at start up, the proportion of SMEs using bank finance remains steady throughout, at just under 30%.”

Sir Michael comments: “These findings highlight the importance to SMEs of matching different types of expenditure with the appropriate sources of finance, and demonstrate how vital it is to success that businesses are able to diversify their sources of funding.” He continues: “Pairing the right sort of funds to each asset and expense is essential to proper cash flow management — while it also spreads risk, so that businesses are not forced to put all their eggs in one basket.”

Interestingly the research, which is the first study to date to systematically explore and validate what success really means to SME entrepreneurs, reveals that successful SMEs regard greater customer satisfaction (89%) and greater customer retention (86%) as two of the top three key factors in evaluating year-on-year success for their business, along with growth in business profits (86%).

The report, which set out to identify the factors which produce innovation and business success among SMEs, further identifies the growing importance of entrepreneurial learning, plus the use of social media as factors contributing to SME success.

*Professor David Gray, Professor Mark Saunders and Harshita Goregaokar of the University of Surrey received the award for Best Research at the second International Conference of Innovation and Entrepreneurship (IE2012) in Singapore. In addition to a literature review, the research paper included some of the early results and laid out the research methodology.

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