Financing For Growth in SME's Deloitte Touche Tohmatsu Survey Viljenka Godina and David Crackett

Abstract The survey was commissioned by the Deloitte Touche Tohmatsu European SME Group, the organizer and sponsor of the competition "European Small Business Person of the Year", and involves candidates for this competition over a six year period. It is focused on growing small and medium-sized enterprises active in international markets and highlights internal factors for their success, as well as the characteristics of their business environments which have been recognized as obstacles to growth. As expected, finance was found to be an important issue in all enterprise development stages. The survey studies different forms of finance and summarizes entrepreneurs' opinions on their main characteristics. It also includes activities provided for expansion of businesses in local and foreign markets and evaluates their efficiency. 1. Introduction Enterprise growth is influenced by internal and external factors. Some very successful businesses have proven that an appropriate combination of internal factors, such as innovation, management skills, marketing, customer care, development of people, etc. that have kept up with market challenges should be considered as the best way to success. It can not be denied, however, that external factors, including various support activities, such as access to appropriate information, technology, professional advice, training, etc. provided by public and private organizations, have an important impact on the development and growth of enterprises, in particular small and medium-sized ones. Access to finance is often considered one of the key issues for the promotion of business expansion. Entrepreneurs are seldom satisfied with forms of finance available for business growth in domestic, as well as in international markets. On the other hand, numerous different forms of finance are available in Europe, some of them specifically designed to match the needs of SMEs. How are they assessed by European entrepreneurs? Does the gap between available and suitable forms of finance really exist? How could it be overcome? 2. Objective The survey, commissioned by the Deloitte Touche Tohmatsu European SME Group has examined the main obstacles for faster growth and internationalization of SMEs as well as the needs of growing SMEs for different support activities and forms of finance in different stages of their development. The survey has also assessed the suitability of most frequently mentioned support activities and forms of finance, as they are seen by entrepreneurs. 3. Target Group The survey was performed with a group of selected entrepreneurs from different European countries who were involved in the competition "European Small Business Person of the Year". The competition has been organized and sponsored by Deloitte Touche Tohmatsu since 1993. Candidates for the competition were selected on the basis of a set of criteria that included: growth in turnover, profits and employment, successful products/services, innovation, excellence in management and international operations.

During the period of six years over 60 selected candidates were proposed for the final stages of the competition by Deloitte Touche Tohmatsu and by the EFMD Small Business Steering Committee members. Candidates are active in different sectors and in different markets, thus covering a variety of cultures of domestic and host countries. 4. Methodology The survey is based on empirical research in a selected sample of companies that corresponded to the following specific criteria: fast growth (turnover, profits, employment), international operations and elements of management excellence. The survey was carried out on the basis of a questionnaire, designed to provide data and information on key issues. The first part of the questionnaire includes general information about entrepreneurs and their businesses, a brief history, a description of their products and basic financial data for the period of 1995 to 1998. The second part of the questionnaire includes information on the business support environment in general, with specific focus on financing and other related support schemes. Entrepreneurs were asked to complete the history and company financial data by themselves (first part of the questionnaire). The second part of the questionnaire contained assessment of key factors for success in the past and the future, information on used support instruments and forms of finance including assessment of their suitability and entrepreneur's comments and suggestions. This was completed jointly with the research staff during the telephone interviews with entrepreneurs. This approach has provided a higher number and quality of replies. As expected, the reply rate has exceeded 75% and the quality of replies is very good. Questionnaires were processed by using standard computer processing tools for empirical research (SPSS). Figures and tables were supported by Excel. Assessment of growth for individual enterprises is based on quantitative and qualitative indicators over the period of four years (1995 to 1998). Quantitative indicators are represented by indices (turnover, profits, exports, number of markets, number of employees). Qualitative indicators include: changes in products, technologies, innovation, changes in management style, assessment of management of people. The main obstacles for expansion of businesses, as well as the influence of internal and some external factors for success were assessed by entrepreneurs and ranked by importance (grades 5 to 1). Availability and relevance of support activities are assessed by importance as ranked by individual entrepreneurs. Assessment of forms of finance was carried out on the basis of several characteristics, including procedure, documentation, rates, fees, specific requirements, etc. Recommendations for improvements are be based on knowledge of best practice and suggestions of the entrepreneurs involved. 5. General Indicators of Growth The target population was a carefully selected group of candidates for the "European Small Business Person of the Year". Most of them operate in the manufacturing sector, some of them also in services Candidates were expected to show growth in turnover, profits and employment and to operate in foreign markets. All enterprises involved have continued to grow. They have increased turnover and exports and most of them also the number of employees. Their export growth exceeded growth in the domestic market through increased shares in current markets or through attracting new markets in Europe or worldwide.

6. Factors for Success The majority of entrepreneurs believe their achievements to date have been excellent and have assigned their success to new products or services, often driven by the customer's demands. Frequently they believe that their competitive advantage is derived from the ability to offer a full range of products and services, serving a market niche, attraction of new markets, as well as the importance of skilled people and management of good teams. 6.1 Management Excellence As shown in figure 1 (omitted), management excellence is in most cases strongly (almost 100% of answers) represented by leadership, management and development of people and quality management, over 50% of entrepreneurs have also ranked as very important management organization, financial management and training & management development. For their previous developments, the entrepreneurs have assigned internal factors as more important for their success than external (See figure 2 -- omitted). Among internal factors, the importance of innovation in products and services has been ranked first place, followed by innovation in production (new technologies). Customer care, development of people and quality management are also strongly represented (75% of entrepreneurs have ranked them as very important). External factors for success have been on average assessed as less important. But a distinction should be made between enterprises in earlier stages of growth that seem to assess the importance of external factors as strong, particularly access to market information and appropriate finance, and well established enterprises that have assessed these factors as less important or even irrelevant. It is also significant that these latter companies have ranked access to business advice & management consulting before access to appropriate finance or market information. Entrepreneurs will base their future success (see Figure 2) strongly on customer care and quality management (assessed as very important or important by almost 100% of answers), innovation in products/services and on new technologies (80 - 90% of answers assessed them as important). Development of people is strongly represented again. A shift is shown to greater importance of management development and training. Surprisingly, also external factors have been assessed as slightly more important for the future, particularly access to appropriate finance (over 50% of replies viewed it as very important, including also well established enterprises that had not considered access to finance as important in the past). Access to market information and business advice & management consulting have been assessed as less important or irrelevant, particularly by the entrepreneurs who have achieved stable growth, again. 7. Support for Business Growth and Internationalization 7.1 Obstacles for Growth and Internationalization Before the entrepreneurs were asked the questions regarding the business promotion support activities, they were requested to indicate the main obstacles for expansion in their countries and for internationalization of their businesses.

In figure 3 (omitted) it is clearly shown that entrepreneurs consider the availability of skilled labour and bureaucracy as the main obstacles for growth of their businesses both in their local environment and internationally. Approximately 50% of them have also defined labour costs as an obstacle. Only a few of them mentioned taxation, mostly with respect to personal income tax. Access to customized information and advice, assistance with contacts, market information and bureaucracy have been assessed by the majority of entrepreneurs as obstacles for attracting foreign markets in the EU member states. The situation is somewhat similar for the USA. The markets of the former communist countries are additionally characterized by political, financial and economic uncertainty, inefficient and time-consuming administrative procedures and high protectionism. 7.2 Support for Growth Entrepreneurs do not appear to have taken full benefit of the various business support activities available in their respective countries. As shown in Figure 4 (omitted) many have participated in fairs and exhibitions (organized in most cases by chambers) and obtained finance (provided by public agencies, specialized public institutions and commercial banks). Access to technology has obviously not been so important. Quite surprisingly some 40% of the entrepreneurs have not benefitted from specific education & training programmes. Here, a distinction should be made between enterprises in early growth stages and well established enterprises. Similar answers have been provided for business advice & management consulting. According to their additional comments, the entrepreneurs are well acquainted with various support activities available in their countries. The reason why they are not more frequently used might be summarized as: they consider them too general and poorly customized to their specific needs in different stages of the company life cycle. Almost two thirds of them would be appreciative if public or private organizations in their countries could provide measures and activities to match specific needs of growing companies, such as: •

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Promotion and assistance in marketing, particularly in-depth information and tailored information on specific sectors and their expected development trends in the future, assistance, including financial support, with market research that is considered too demanding and too expensive for individual SMEs Support for R & D activities, including appropriate forms of finance for development of products and services Reduction of bureaucracy, including further deregulation and simplification of administrative procedures, Many of them have put forward requests for reduction of labour costs. There were, however, a few of them who have expressed opposite opinions. The most extreme statements could be summarized as follows: • governments should not interfere at all, if cheap money is used for any development purposes it would distort the market • chambers and other private organizations can not do much.

More thorough analysis of the companies' backgrounds has, however, shown that attitudes towards the support activities have to be put in correlation to their development stage. During earlier periods of growth (start-up period, early growth, or, more generally, "small companies"), enterprises are more dependent upon support measures or finance provided under favourable conditions.

As the internationalization of operations is concerned, comments of the entrepreneurs are somehow more unified. First of all, it seems that the entrepreneurs do not think that good information and advice on various aspects of doing business in foreign countries are available in Europe. Local support activities for internationalization of operations are often found as not customized to the entrepreneurs' needs. Lack of some basic information (e.g.: legislation, information on cultural differences), contacts, advice and assistance with market information are often seen as serious obstacles for expanding operations to new markets. If taken into account that all the entrepreneurs have been active in international markets, it was assumed that they have contacted relevant institutions/organizations providing information and assistance with establishing contacts, starting branches or other forms of international operations. It was also assumed that numerous forms of information available in different media (such as publications, international data bases) and numerous organizations that provide all kinds of information would be greatly used by the entrepreneurs. On the contrary, it seems that entrepreneurs share a quite common opinion: •

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An enormous volume of information is confusing. Since information is generally not destined to their specific requirements, the entrepreneurs have found utilization of it complicated and time-consuming. Many of them have expressed that they have been unable to benefit from it. As one of them has pointed out: "Sometimes is not easy to define your request properly..." They have however agreed that written information (particularly in their own languages) would be of significant help at the stage of assessing possibilities for entering a new market, likewise data bases would assist them with initial information on potential contacts. Since most of them have experience with bureaucracy in foreign countries which normally creates greater problems than at home "because you do not know how it works", they would greatly appreciate 'one-stop-information (advice)-shops' with skilled and well informed staff to provide in-depth information (if possible in their own languages or at least in simple English or other widely spoken languages). It should be added immediately, that entrepreneurs would appreciate much more detailed and customized information and advice on potential partners, competitors, practical issues of legal aspects and cultural specifics related to business operations in a specific environment. Approximately, one half of the entrepreneurs have tried to obtain information from government bodies (embassies, representatives) or chambers, but were generally quite disappointed (there are some exceptions in individual countries). Most entrepreneurs would have contacted organizations and institutions of the host country, if they had known their addresses, contact persons and how they worked. It seems, however, that they had difficulty in obtaining such information. Consequently, most of them have reported that they have used their partners and other private contacts for obtaining detailed information on markets, legislation and culture. As one of them emphasized, "However, you can not obtain information about your competitors from your customer or about his competitor from your supplier!" Some 20% of the interviewed entrepreneurs would with no doubt contact "a good professional consultant", and would like to be provided with advice and recommendation for bringing a decision. Some one third of the entrepreneurs, however, would prefer to obtain information and advice from less "private" sources, presumably having in mind also the price of consulting services.

8. Financing for Growth 8.1 Finance as an Obstacle for Expansion of Businesses Entrepreneurs were asked to indicate the importance of finance in different stages of the company's life and in which areas have they found it an obstacle.

Finance is considered a very important issue in all development stages of an enterprise by all the entrepreneurs. As shown in Figure 6 (omitted), entrepreneurs have been least successful with raising appropriate finance for initial operations. In this stage most of them stated that they financed their start-up with their own savings. They have complained that no finance is available for starters, either from banks, or from other providers of finance. During the expansion stage, finance for premises and equipment have been assessed as being much easier to access. A few of the entrepreneurs have pointed out that working capital might represent a problem in some cases. Investment in development of export markets and financing export are estimated as not problematic. As shown in Figure 7 (omitted), the entrepreneurs have had little experience with merger and acquisitions on financing of buy-outs. Over one half of the entrepreneurs have reported that raising finance during the recession in their company represented a problem, particularly with respect to cash-flow. It can be summarized that access to appropriate finance is difficult for enterprises that have not yet achieved stable financial results regardless of the nature of the business or its earnings potential. During these stages, it seems that few forms of finance are considered completely appropriate and customized to the entrepreneurs' specific needs. As a rule, more stable, developed businesses are offered much more attractive and viable assistance by providers of finance and can chose between different options. As some of the entrepreneurs said: "When the company becomes bigger, things are much easier". Although some of the most frequently used forms of finance will be discussed later, we would like to refer to some of the most frequent comments concerning accessibility of finance for different purposes: •

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Start-up finance has been considered a problem by all entrepreneurs. In most cases they have referred to bank loans which, as a rule, are not available for start-ups. The concept of 'seed money' schemes was familiar, but none of the entrepreneurs had benefitted from them. Two of them, however, had been involved in public support programmes for starters (young entrepreneurs) and had benefitted from specific training and professional support activities. In several cases entrepreneurs have made comments on accessibility of appropriate finance for financing R & D activities during expansion of their business. According to their comments, the pure development of a product would not be considered such a serious obstacle as the related investment in production technology and equipment and launching of the product on the market. For such purposes, finance was not seen to be available from commercial banks and other commercial institutions. In a few cases, the entrepreneurs had benefitted from public support schemes (grants, subsidized loans, reimbursements for accomplished investment) which are available and well organized in a number of countries. Concerning finance for export promotion activities, the entrepreneurs have expressed different opinions: in general, they have appreciated export promotion schemes provided by public or private organizations in their countries, but some of them have considered such schemes too expensive or not sufficiently appropriate to their needs.

8.2 Forms of Finance The entrepreneurs were presented questions on forms of finance used during the life cycle of their companies for different purposes. According to their answers, most of them have used long- and short-term commercial loans. About half of them have also benefitted from various public support schemes, such as: development funds for specific purposes, guarantee schemes and export promotion schemes. As shown in Figure 7 (omitted), only a few of them have experience of public venture capital funds or have involved private investors.

Only two of the entrepreneurs have so far decided to raise capital on the stock market and one entrepreneur reported that he has not used any external financing at all during the lifecycle of his company. The most frequently used forms of finance were studied in detail: long and short-term commercial loans, finance for specific purposes under favourable conditions and leasing. The entrepreneurs were asked to assess documentation for raising finance, different characteristics (such as: interest rates and fees, portion of self-financing and collateral for long-term loans), approval procedure and delivery time of financing. Short-term loans are the easiest accessible form of finance and the most frequently used. Most of the interviewed entrepreneurs have made no negative comments related to information available about this form of finance, documentation, approval procedure or delivery time. In most cases, entrepreneurs are well supported by their banks and such loans would not require collateral. The characteristics of long-term loans were not viewed so positively. Almost all entrepreneurs have reported that they were well informed about availability and characteristics of this form of finance in their countries but only two thirds believe that it is appropriate for their needs. In all cases, the entrepreneurs were requested to submit business plans and audited financial reports, in a few cases (presumably sole proprietors) they were requested to provide statements on personal income. Required documentation was assessed as reasonable in most cases, although a few entrepreneurs have found it complicated and several entrepreneurs made comments that bankers should not base their decisions only on the financial side of a business. The required portion of self-financing, the interest rates, the fees and the percentage of collateral differ from country to country and from case to case. The required position of selffinancing was between 25 and 60% of the total amount of the loan, most frequently it would account for one third. In most cases interest rates range from 4 to 7% annually. The fees are more varied, amounting 0.3 to 1.0% of the loan. All entrepreneurs reported that collateral was required, normally from 30 to 100% of the borrowed amount of money. Several entrepreneurs believed that interest rates, fees, collateral and related expenses are too high. Approval procedure was in most cases was assessed as reasonable, as was delivery time. There are, however, substantial differences between individual cases: approval procedure could last from 3 to 60 days and delivery time would be in most cases 3 to 7 days. Most entrepreneurs who used public financial support schemes have welcomed them. in most cases they were provided as grants, either at the beginning of the investment or as reimbursement after the investment was accomplished. In several cases, it was indicated that such schemes should be widely available and also easier to access: some of the entrepreneurs have reported that approval procedures were quite long, that such money is not permanently accessible (the procedure sometimes requires public tenders which are open once a year) and that raising money from such sources can also be quite complicated. In spite of that, entrepreneurs have appreciated such financial support, particularly for specific purposes and investments that characterized milestones the company's life, such as: introducing new technologies, development of products, attracting new markets. 8.3 What Should be Done to Improve Access to Finance The entrepreneurs have provided an array of comments and suggestions for improving access to appropriate finance for growing SMEs. First of all, they have indicated that available forms of finance do not fully match their specific needs. This should be related to the availability of suitable forms of finance in general, to their characteristics and to attitudes of providers of finance towards SMEs.

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The entrepreneurs do not consider that providers of finance understand the needs of SMEs. Several entrepreneurs have found it difficult to be understood by bankers: they should not base their assessment of the enterprise only on the financial aspect of the business, but should also understand the technical part of it. Additionally, they do not take any risk. Consequently, entrepreneurs can not raise money for some very important aspects of their company activities, like development of products, attracting new markets which are considered too risky, even though such developments could bring viable results in a short period of time if they were properly and timely financed. In general, entrepreneurs would also appreciate a more active role of the banker in providing solutions for specific financial needs of the business. Some of the entrepreneurs have pointed out that the policy of financing SMEs should be completely changed: small companies have little chance to attract appropriate finance, no matter what their development potential. Therefore, adequate forms of finance, including seed capital, specific funds for development of products, guaranties that would enable sharing of risks between the entrepreneur and the provider of finance, should be more easily accessible. Public money should greatly facilitate accomplishment of development tasks in early stages of growth. The measures suggested included easy accessibility (information, advice with selection of specific forms of finance and assistance with preparation of documentation). There should, however, be strict control over the financing arrangements facilitated by assistance and advice provided to entrepreneurs in critical situations. Applications for bank loans and bidding for public money have often been considered complicated and time-consuming. Some of the entrepreneurs would appreciate more standardized procedures. As suggested, introduction of the common currency would be a good opportunity to initiate some measures in this area. Entrepreneurs have also critically assessed their own performance: they consider that good business plans, a thorough investigation of markets, good calculations of costs and reliable financial forecasts should be considered of crucial importance, not so much for a banker, who would not take risk anyway, but for the entrepreneur himself "When the company becomes bigger, everything is easier" they said and it is not related only to more stable financial results that would convince the banker and attract his trust, but also to their own knowledge and skills: planning and forecasting is more effective when the entrepreneur is able to rely on his own information and when decisions are brought on the basis of viable arguments. For such projects, several entrepreneurs believe the assistance of professional consultants as viable. It seems, however, that developed medium-sized companies either work with consultants on a daily basis or do not need their assistance any more. Small companies with growing potentials which would presumably need professional assistance often consider it costly and have few resources for such expenditure. They would prefer to obtain such assistance free from the provider of finance or from a relevant public or private organization. The entrepreneurs have also envisaged a more active role for private organizations (such as chambers and associations) in improving the accessibility of appropriate finance. They should in particular assist small companies with building trust among the providers of finance by: raising awareness of the importance of SMEs for the national economies, by wider promotion of successful cases and by providing support for their members proposals to finance providers and public agencies.

9. Conclusions On the basis of preliminary results certain key aspects have been clearly identified: • • • •

During their earlier stages of growth, enterprises are more likely to seek external support, whilst well established and stable companies rely more on their own resources, established networks and partners. Access to customized information and advice, assistance with contacts, market information and bureaucracy are considered as obstacles to entering foreign markets. Labour costs and availability of a skilled labour force have been ranked as the most serious obstacles to faster growth and the internationalization of businesses. Finance is considered a very important issue in all stages of an enterprise's development. Access to appropriate finance is difficult for enterprises that have not yet achieved stable financial results.

About the Authors Viljenka Godina, Director of Economic Institut Maribor David Crackett, Chairman of Deloitte Touche Tohmatsu European SME Group Contact person: Ms. Viljenka Godina, Direktor Economic Institut Maribor Razlagova 22 2000 Maribor Slovenia Tel: +386 62 226 342

Fax: +386 62 212 597

E-mail: [email protected]