Professor Marc Cowling

In this paper we focus specifically on start-ups in remote rural island entrepreneurial ecosystems (EEs) and consider the differences between these entrepreneurs compared to their mainland Scottish and UK counterparts.  We find that Island new start-up entrepreneurs tend to be older, less well educated, more likely to be female, and less likely to be from an ethnic minority. They borrow similar amounts of start-up capital than their mainland counterparts and are equally likely to survive.  Despite their geographical remoteness, this suggests that entrepreneurial activity makes a meaningful contribution to their respective EEs.   

Theories of loan contracting in the presence of asymmetric information highlight the key role of collateral in
mitigating against credit rationing. However, theory also allows for the use of collateral by ‘bad’ borrowers in
order to receive better loan contract offers. In this study, we explore the extent to which collateral can affect the incidence of absolute loan denial and partial rationing associated with smaller loans than requested being offered. Using data from a large survey of UK small- and-medium enterprises, we find significant evidence on the negative effect of collateral. Our results also reveal important distinction between lines of credit and term loans, where the presence of collateral is associated with 3 % less term loan approved compared to overdraft. We argue that even the request (or offer) of collateral for a term loan indicates that either the bank or the firm believes it is a risky bet.

Hitherto, the literature has largely overlooked the important role entrepreneurial finance plays in shaping different regional economies.  Using a novel UK data set, this paper calculates inter-regional inflows and outflows of business angel investment to identify the net winners and losers both in terms of number of deals and cash value of investment flows.  We establish that only three regions were net beneficiaries while the other eleven UK regions and cities examined were net losers.  The reduction in “home bias” in angel investments may undermine the efficacy of policies aimed at stimulating localised investment and calls for greater demand stimulation policies to help alleviate the problem of “thin” regional markets. ​​​​​​​

The blame for under-investment, low growth, and low rates of innovation has been placed firmly at the door of investors and financial market intermediaries due to their perceived short-term behaviour. Research has identified an array of reasons for the existence of short-termism including under-weighting long-term earnings outcomes, financial frictions increasing with investment horizons, and the forced adoption of financial control systems to feed investors’ need for quarterly earnings accounting reporting. A consequence of short-termism is that firms may choose second-best shorter-term investment projects, and reject long-term value enhancing projects. Yet, the majority of this research has focused on the corporate world where there are large investors, shareholders, boards of directors, and managers, all of whom have different goals and objectives. This leaves a significant gap in our knowledge about the other 99% of firms in the economy that are small, owner-managed, have no separation of ownership and control, and almost exclusively finance their investment needs with bank debt. This is the gap that our study aims to fill by analysing a large UK finance and investment decision-making survey which includes all classes of firm. We find that the causes of short-termism on the firm side are different depending on the size of the firm. As a starting point, we find that 58.8% of firms choose an investment payback period of three years or less. However, short-term investment payback years are most evident amongst the smallest firms suggesting that financial frictions influence the very smallest firms to invest short-term and shareholder short-termism influences the largest firms to invest short-term, but only for R&D projects.

To effectively mitigate climate change, a crucial focus area is enhancing energy efficiency in firms and industries. This objective becomes even more imperative in light of the recent escalation in energy prices caused by the Russo-Ukrainian war. Given the limited financial resources of Small and Medium Enterprises (SMEs), facilitating their access to finance becomes a potential avenue for reducing carbon emissions. Based on our knowledge, this is the first study that analyses the potential impact of energy efficiency on access to finance for SMEs in the UK. We consider a dataset of 2855 UK firms from 2015 to 2021 collected from the Longitudinal Small Business Survey. We find that energy efficient companies and firms that show energy saving behaviours are facing fewer credit constraints. These results are robust if we control for several company characteristics, including age, size, turnover, industry, location, and legal status.

Recent research has identified a key subset of the business population that comprises firms who had sought external finance but subsequently withdrew from the credit market completely despite still requiring finance. Utilising the UK’s Longitudinal Small Business Survey between 2015-2020, we identify the consequences in terms of lost jobs and sales of these small and medium-sized enterprises (SMEs) dropping out of the credit market for finance.  We conduct our analysis at the regional and sub-regional level and found that around 230,000 SMEs have dropped out of the UK credit market and that in many localities this has reduced job creation and sales income growth. We conclude that this exclusionary borrowing behaviour will add further to existing regional and sub-regional economic inequalities in the UK, making the “levelling up” agenda a very elusive policy objective.

Recent research into gender aspects of small business financing showed that in crisis periods banks actively reward female entrepreneurs with privileged access to loans because they put forward more realistic and cautious funding proposals compared to hubristic male entrepreneurs. We build on this research by considering in greater detail how broader gender differences in entrepreneurial confidence play out in the context of bank lending. Further, we also question whether banks treat overconfident female entrepreneurs differently from their overconfident male counterparts. Our findings show that on average there is no discrimination but if a female entrepreneur dares to exhibit overconfidence then this all changes.

The economic consequences of COVID-19 were severe with restricted economic activity generating a liquidity crisis for many firms. To address the systemic impact of this liquidity shock, governments around the world rapidly introduced a range of loan guarantee schemes. In the UK, more than 1 million businesses accessed these schemes. Using a novel, comprehensive dataset, this paper explores the regional distribution of access to these schemes and how this was mediated by regional differences in lending institution. Our results show that while the schemes were national and unaligned with regional policy, access favoured firms in poorer regions, and regional differences in lending institutions had a significant influence on the nature of lending.

In this paper we provide new evidence on the dynamic evolution of discouraged borrowers over a long-time period. Using a cross-country panel of firms from the Eurozone, we first uncover the characteristics of discouraged borrowers, their evolution over the business cycle as well as the underlying reasons driving borrower discouragement. Then, as a second step, we link the outcome of both term loan and credit line applications for firms that declared to be discouraged in the past. We show that half of the ex-discouraged borrowers obtained a term loan and/or a credit line once they applied, suggesting that those borrowers are conscious that their credit risk profile had improved.

In 2012, the UK government made the decision to offer loans to new entrepreneurs who were excluded from the credit market through the start-up loan (SUL) scheme. By 2021, loans totalling £759 million have been issued to 85,809 new start-ups. A disproportionate share of these SULs was issued to previously unemployed people to support their transition into self-employment. This paper questions whether those who started with the fewest resources achieved better or worse outcomes than those who started from a more beneficial position. Our findings show that previously unemployed start-ups had smaller loans and that they had a higher default hazard on their loans than entrants from waged employment, but more educated and older unemployed entrants survived longer. More generally, SULs to unemployed start-ups were cost-effective for the government in a loan portfolio sense, but once the benefits of supported entry into self-employment were fully accounted for, the overall contribution was very positive. This highlights the potential more comprehensive societal benefits of removing capital constraints by supporting the transition from unemployment to self-employment. Furthermore, we propose testing the effect of replacement start-up subsidies by soft loans in those countries, offering only direct grants, to increase the efficiency of public financial resources.

The concept of the ‘discouraged’ borrower is well documented. In this paper, we consider whether smaller firms in the UK who have been previously rejected for bank loans have been scarred by the experience so badly that even in the presence of two exceptionally generous Covid-19 loan guarantee schemes, they still refuse to make an application. Furthermore, we also consider what happens when they do. As banks have either zero or minimal loss exposure, do they still maintain their normal strict lending protocols or do they relax their standards to fulfil the governments’ objective of supporting struggling businesses through the crisis? Our findings show that 72% of previously rejected borrowers are reluctant to request loans. We find some evidence that previously scarred firms faced such severe liquidity problems that they relaxed their distrust of banks during the Covid-19 crisis. However, their share of the government-guaranteed loan portfolio was slightly lower suggesting that banks were treating each new loan application on its merits.

The scale of the UK government's response to the Covid-19 crisis after the first lockdown in March 2020 was unprecedented. For the business sector, two financing schemes were particularly relevant: the Coronavirus Business Interruption Loan Scheme (CBILS) and the Bounce Back Loan Scheme (BBLS). Both were designed to support the capitalization of businesses through this difficult trading period. In this paper, we use data covering the first two quarters of the Covid-19 crisis to explore the dynamics of small and medium-sized enterprise (SME) financing and in particular the role of government support schemes. Our findings show that 92.1% of all debt funds provided in this period were backed by the UK government, which compares to less than 5% under normal circumstances. We find that the demand, supply and government share of SME lending increased from Covid-19 quarter 1 (April–June 2020) to quarter 2 (July–September 2020), that micro and small businesses had the highest demand for loans, and that better-performing firms were more likely to receive loans. Further, in a world where more loan requests than ever were granted, the government share of this pool of loans had a different risk profile than the small pool of non-government-backed loans.