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ACCA Research Report No. 95

Aidan Berry, 2006

Executive summary

The issue of small business finance, the relationship between SMEs and their bankers and the role of accountants as advisers of SMEs have been subjects of considerable research over a long period in the UK and in other countries. Most of the evidence from that work establishes the importance of the banking relationship and the accountants’ role in providing advice to SMEs. The research evidence does, however, show variations in the levels of SME satisfaction with their banking relationships. This, together with evidence from other countries with different banking structures, has led to suggestions that banking structures may be an important determinant of SMEs’ levels of satisfaction with their banks.

Although research studies from different countries exist, each study differs in terms of aims, the questions asked and the method of data collection. To date no research has been carried out that uses the same research instrument to collect data from SMEs in different countries. This research addresses that gap in the literature and provides data that are comparable from country to country.

As well as providing comparable data the research also highlighted country-specific factors that needed further investigation. This was undertaken during the second phase of this research through a series of focus groups and interviews. Some of the findings warrant additional work.

The analysis provides some interesting and important insights into SMEs’ relationships with their banks and the effects of differing banking regimes and industry structures. It identifies some potential gaps in the provision of small business finance and advice and provides more understanding of the role of accountants as a source of financial and general business advice. The cross-country comparison provides insights into the effects of structural differences in the accounting profession and an indication of the potential impact of the separation of the audit, tax, preparation of accounts and advice functions on the future relationships between SMEs and their accountants.

EMPIRICAL EVIDENCE

Quantitative

1. Telephone interviews among SMEs.
   • 1,004 SMEs were interviewed.
   • All sizes of SMEs were represented in each country.
   • A wide range of industry sectors were covered.
   • The continents represented were Europe, America and Asia.
   • Countries covered were Germany, Hong Kong, Spain, United Kingdom, United States of America.
2. An online survey among ACCA members in the UK elicited 377 responses.
3. An online survey among ACCA members in Hong Kong elicited 127 responses.

Qualitative

There were face-to-face interviews with:

• six practising accountants in the US.
• a focus group with five practising accountants in Spain.
• a focus group with six practising accountants in Germany.

Research conducted Winter 2005 to Summer 2006.

SMEs AND THEIR BANKING RELATIONSHIPS

Relationships

• There is a wide variation in the number of banking relationships SMEs sustain, from an average of 1.4 relationships in the UK to around 4 relationships in Spain.
• The variation in the number of relationships is primarily related to the country in which the SME resides.
• The structure of the banking industry in a country is a significant determinant of the number of relationships an SME has.
• Consolidation of banks may lead to an increase in the number of relationships SMEs have, as accountants advise them to spread their banking risk.

Services used

• The banking services and methods of finance used by SMEs vary with size but the primary determinant of the variation is the country of residence.
• SMEs tend to have more banking relationships where a combination of different types of bank provide different services and compete for SME business.
• Cultural norms and attitudes within countries may have an effect on SMEs’ choice of financial service.

Raising finance

• SMEs wishing to raise finance are generally able to do so in full or in part.
• Banks are either the sole source or one of several sources of finance for SMEs in all countries studied.
• Accountants from all countries identify a lack of collateral or security as a frequent reason for refusals to provide finance.
• Although for German SMEs lack of collateral is an important factor, the primary reason for refusal of finance is lack of equity resulting from the impact of tax laws on German SMEs.
• In the UK banks are used less as the main source of finance than in the other countries surveyed.

COMMUNICATION AND SATISFACTION WITH BANKS

Communication

• For smaller SMEs, visiting the bank is very important, with nearly 75% of the smallest SMEs visiting their bank.
• The larger SMEs tend to use more remote communication methods, such as telephones, writing and electronic communication, with 86% of the large SMEs using electronic communication.

Satisfaction

• In general SMEs are satisfied or very satisfied with the services they get from their banks.
• SMEs in the £50,000 to £1million turnover range are generally less satisfied with their banks than SMEs outside this turnover range.
• SMEs are less satisfied with their banks’ charges and tariffs.
• SMEs are also less satisfied with their banks’ level of understanding of their business.
• Accountants are also critical of the level of charges and bankers’ level of understanding of their clients’ businesses, although the extent of the criticism varies from country to country.
• The ‘centralisation’ of decision making in banks as a result of consolidation of the industry appears to lengthen the decision-making process and to decrease the level of communication between the decision maker and the SME, leading to reduced levels of understanding of the business and the environment in which it operates.
• Country variations on satisfaction are present in the data but these are likely to reflect cultural factors rather than being related to the banking structures in each country.

Benefits and propensity to change

• The benefits received by SMEs in the form of free transactions and interest on current accounts vary according to size, with the smallest businesses most likely to get no benefits.
• The benefits are, however, more affected by the country in which the SME resides; SMEs in Spain and Hong Kong are least likely to receive ‘no benefits’ and those in the UK are most likely to receive ‘no benefits’.
• SMEs in continental Europe are much more willing to change bankers than their counterparts in Hong Kong, the UK and the US.

CHALLENGES FACED BY SMES

General issues

• Obtaining new business and general finance-related issues are the biggest challenges facing SMEs.
• Future planning is high on the list of challenges facing SMEs.
• Public sector bodies are identified by accountants in a number of countries as prime examples of slow payers.

Country-specific issues

• In the US, recruiting and retaining employees is identified as an issue by SMEs and this is confirmed by the accountants interviewed.
• The cost of employees is an issue for Germany, with the accountants’ focus group suggesting that with new EU employment legislation this will become more important.
• SMEs in Spain identify competition as an issue. The focus group suggested that this is due to competition from low-wage economies such as the accession states, now that Spain is no longer a low-wage economy.
• German SMEs identified slow payment as an important issue whereas although this is an issue in Spain the use of factoring by SMEs offsets its effects.
• Red tape and regulation is more of an issue in the UK and Germany than in any of the other countries surveyed.

ADVICE, ADVISERS AND THE ROLE OF THE ACCOUNTANT

Sources of advice

• Accountants, lawyers and banks are the most frequently used sources of advice.
• SMEs’ use of advisers is correlated to the size of their business, with 75% of the largest SMEs seeking advice compared with 43% of the smallest.
• Country variations exist in the ordering of accountants and lawyers, some of which are role related, eg the split between tax advisers and accountants in Germany and the role of lawyers in Spain.
• Country-related differences are also apparent in the use of business colleagues. From the explanations provided by the SMEs’ accountants, this is related to issues of attitude and trust.
• Government and public agencies are ranked lowest as a source of advice; explanations for this included lack of expertise, trust and commitment.

Role of accountants

• Accountants are the most frequently used source of advice across the whole sample.
• They are used most for tax, audit and accounts preparation work.
• Fewer than 40% of SMEs claim to use their accountants for business planning, general advice or as management consultants.
• Similarly, fewer than 40% claim to use their accountants for advice on finance.
• The accountants’ results on these areas differ – discussions suggest that advice is often sought in a less formal way and sometimes after the first approach to a financier.
• The use of accountants for advice on finance varies from country to country, with Spanish SMEs using their accountants almost twice as much as their UK counterparts.

Influencing factors

• The effects of variations in regulations covering SMEs’ financial reporting make inter-country comparisons difficult without further in-depth research.
• The acceptance by bankers in the US of annual accounts prepared for tax purposes, using tax-related rules rather than generally accepted accounting practice, appears to be a sensible way of reducing burdens on SMEs.
• The separation of accountants’ roles to comply with professional guidelines on auditor independence may inhibit the use of accountants for both finance and business-related advice.

CONCLUSIONS

The findings from the study show that SMEs’ levels of satisfaction with their banking arrangements are generally very high, although there are areas where this could be improved. The inter-country comparison shows that there are vastly different ‘norms’ for the number of banking relationships an SME might have. Nonetheless, there does not appear to be a significant negative or positive correlation between the number of banking relationships and levels of satisfaction.

Although the size of the SME and the complexity of its financing needs may be a contributory factor in determining the number of relationships an SME has, the primary factor is the country in which it operates. This may be because the number of such relationships may depend in part on the different historical structures of the banking industry in different countries. For example in the US, Germany and Spain there are more banks operating than in the other countries studied, and there is a longer tradition of small localised and specialised banks. This affects the number of providers a business may have to use to meet its financing needs. The existence of a localised banking structure may also affect the expectations of bankers and their knowledge, not only of the business but also of the environment in which it operates.

The indications are that consolidation in the banking industry in Germany, Spain and the US is providing new and unexpected challenges for SMEs as the potential for a bank’s policies to change after consolidation may leave them without a source of finance. This in turn is encouraging accountants to advise clients to have multiple banking relationships to reduce the risk arising from changes in banks’ policies. It is also clear that differences in size and function of banks in different countries, as well as increased competition, lead to differences in the number of banking relationships that SMEs have. The overall conclusion to be drawn here is that there is no one right way of setting up a banking structure to support SMEs. Indeed, it would appear that the different systems have worked in the past but that some of the changes that are currently occurring, perhaps influenced by global competition or by regulatory changes such as Basel II, are having unintended consequences some of which are detrimental to SMEs’ established banking relationships.

There appears to be a gap in the provision of finance for SMEs with an annual turnover of up to £1 million, which leads to lower satisfaction ratings by this group of SMEs. The reasons for this are not immediately apparent although respondents have suggested that the cost of providing a fuller service is such that banks are reluctant to do so. On the other hand, if the services demanded were only those based upon the services these SMEs currently use, meeting their needs would not be a problem nor would there be a lower satisfaction rating. It would appear, therefore, that the supply does not match the demand or expectations of this group of SMEs. It is possible that the explanation here may lie in the fact that, because of their reliance on collateral, their aspirational needs are not being met and this, as suggested by some accountants interviewed, is acting as a barrier to further growth among SMEs within this size range.

The main issues faced by SMEs tend to be business issues such as competition and getting new business. These are difficult issues for SMEs to address and they are likely to get worse as a result of the impact of the accession states coming into the EU and increasing competition from China and India. Some issues were very country-specific, eg the problems of recruiting and retaining employees in the US and the cost of employees in Germany, but when considered together with the effects of competition these may also provide some indications for the future of SMEs in other advanced countries, especially those within the EU.

Although there is considerable evidence from other research that accountants, lawyers and bankers are the most frequently used source of advice and this is confirmed by this survey, there are factors identified within this research which may warrant further consideration. In the case of accountants, the changing structure of the profession and the impact of regulation and self-regulation to protect audit independence, although unlikely to affect tax- and accounting-related advice, may lead to problems for SMEs in accessing appropriate advice on financial and business matters. Similarly the shifts within the banking industry away from localised banking services are having an impact upon the SME sector and are likely to have an even greater effect in future.

RECOMMENDATIONS

The banking industry

Although in general the banking industry is providing a service that satisfies its SME customers, there are areas that warrant further consideration and research:

• the possible gap between the aspirations of SMEs with turnover up to £1 million and the services provided
• the level of satisfaction with charges, tariffs and benefits and the impact of this upon banking relationships
• the effects of moving from localised decision making to more centralised decision making in terms of banks’ understanding of an SME’s business and the business environment in which it operates, and the apparent remoteness of the decision makers from the SME.

The accounting profession

The survey results show very high levels of SME satisfaction with their accountants, but they also highlight some areas for concern:

• the relatively low use of accountants for advice on matters relating to finances, which, with an ever-increasing range of financial products becoming available, must raise the question of the sources of advice that SMEs are currently using and the adequacy and appropriateness of that advice
• the effects of regulatory and self-regulatory regimes relating to audit independence on access to accountants as a source of advice
• the question of whether accountants should be taking a proactive rather than reactive role in assisting their SME clients with finance-related advice
• the extent to which accountants can play a positive role in identifying simpler structures for accounting to meet the needs of the various users, eg to what extent the needs of the owner, the tax authorities and financiers can be met by one single form of reporting.

Policy makers and government

The findings show that the effects of regulation and red tape are not universal problems and lessons can therefore be learned from other countries. Some other issues thrown up by this work that may be worthy of consideration include:

• whether there are lessons to be learned from the issues of the cost of employment and the difficulties in recruitment being faced by SMEs in Germany and the US
• how to improve the take-up of government sources of advice to SMEs
• how to encourage smaller SMEs to access the advice that is clearly available to them
• whether to encourage more use of business colleagues as a source of advice, as occurs in Germany and the US, and how to achieve the change.

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