1. INTRODUCTION
Swedish research has repeatedly acknowledged the vital role of
small businesses for the improvement of welfare society. A statistical
study from year 2009 shows that 99% of all companies in Sweden are small
businesses and that the welfare society is more than before dependent on
the success of these businesses (Tillvaxtverket, 2009). Furthermore, it
was shown that a region having a large numbers of small firms is
experiencing a more dynamic industrial environment and healthier
community life (Davidsson, Lindmark and Olofsson, 1994). According to
Olofsson (the Minister for Enterprise and Energy in Sweden) small and
medium sized companies are the key to future growth and success
(Regeringskansliet, 2009). However, the critical factor for these
businesses to exist and grow is the availability of funds to finance
their operations.
According to Landstrom (2003), the most common source of funding
the Swedish small firms is bank loan. This means that the availability
of bank financing is an essential factor for the survival of the small
businesses. A recent governmental study shows that 31% of all small
companies claim that they have problems of obtaining a bank loan
(Konjunkturinstitutet, 2009). In Swedish studies, the difficulties in
obtaining external finance are often termed under the umbrella concept
of "Financial Gap". Generally speaking the concept of
Financial Gap indicates that there exists the state of "asymmetric
information" between the owners of small businesses and financial
institutions. In most cases, the term asymmetric information was related
to the failure of small businesses to prepare financial information in
accordance with what is usually prepared for the context of big
businesses (Landstrom 2003).
It seems like that the previous researchers have examined the
Financial Gap, mainly from the perspective of economic theory and market
information, where the concept of asymmetric information originates.
Arguably, the benchmark used for the evaluation of information produced
for the context of small businesses can be questioned. This study will
reduce the pre understanding effect of economic theory on the
construction of Financial Gap. We, therefore, employ a different
approach to re-interpret the Financial Gap. In so doing we examine the
Financial Gap as a relational concept, for instance, as a phenomenon
that needs re-interpretation in regards with the new situations, actors,
and contexts. In re-interpretation of Financial Gap we will replace the
promises of economic theory with the actors' vocabulary. It is more
sensible that Financial Gap to be examined by engaging the standpoints
of at least two parties, the financial industries and the small
businesses. By engaging the actors--those who experience the Financial
Gap--in the process of interpretation, we will reduce the theoretical
effect of economic reasoning that was repeatedly involved to determine
the Financial Gap (see Bruns 2001; Landstrom 2003). The strategy of
engaging the two parties as actors tend to result in the presentation of
the Financial Gap as a relational concept.
Of course, the existence of the gap between small firms and banks
lead to unfavourable situations for both parties; on the one hand, the
small businesses experience constraints to develop and survive, on the
other hand, banks are restricted from engaging in profitable business in
their surrounding communities. On the other side, it is necessary to
investigate that to which extent the Financial Gap is structured by
theoretical emphasis without engaging the actors in the process of
interpretation. The problem of the study is further specified by
addressing the following questions:
1. How is the Financial Gap described by the owners of small
businesses?
2. How is the Financial Gap of small businesses described by
banking industries?
3. Considering the two parties different ways of interpretation, in
which way can the Financial Gap be redefined?
2. REVIEW OF LITERATURE
Perhaps the first study that showed concern for the existence of
the Financial Gap dates back to the 1930's, when the concept of
"MacMillan Gap" was introduced into the research context. This
concept was invented by MacMillan to indicate that small businesses are
experiencing difficulties in obtaining external capital even though
securities for the loan are guaranteed (Stanworth & Gray, 1991).
Bolton (1971) builds further on MacMillan's findings and emphasize
that the difficulties for small businesses to rais external funding is
related to the problem of knowledge. Later in time, Bruns (2001) argues
that deficient external accounting information and failure in providing
internal accounting information are reasons for why banks deny credit to
small businesses. The Swedish researchers have often interpreted the
Financial Gap as an information gap. For example, Landstrom (2003)
claims that asymmetric information between the two parties is the cause
to the rise of Financial Gap.
Recent Swedish experience, however, showed that banking
institutions have difficulties to match their credit with the risk of
business. For example, the bank fund exposure of big and middle size
companies operating within the building constructions has caused 90% of
the credit losses for two decades ago (Paulsson 2002). One of the big
advantages of the small businesses is their ability to quickly adapt to
the changing environment. This is because they normally have less
bureaucracy than larger firms (Pettit & Singer, 1985) and the
relative cost of credit lost is lower. The owner and manager of small
firms is often the same person and this affects the level responsibility
contributing to the survival of the company (Demsetz, 1983).
Furthermore, the owner is involved in every aspect of the day-to-day
operations; they are engaged in all levels of decision-making
simultaneously which reduces the cost of management control (Demsetz,
1983). Decision-making in small businesses is conducted in an informal
manner. Rice and Hamilton (1979) emphasize on the social perspective of
decision-making and view the decision process as an "open
system" where the decision makers seek satisfactory solutions
rather than optimal solutions based on alternative choice-making. Rice
and Hamilton (1979) explain that the small business owner does not have
a system for filtering the information and will thus experience
unorganized noise. Small businesses do not expend their money on
developing advanced management accounting systems. A favourable aspect
is that the information they use is not rationalized by management
accounting system and it contains ambiguity and contingencies which is a
natural part of operational activities and actions. The owners and
managers of small businesses revealed that most of their decisions were
results from their intuition, experience and guesswork, which indicate
that there is no formal decision-making process carried out in small
businesses (Rice & Hamilton, 1979).
Regarding uncertainty, small businesses seem to accept uncertainty
in a larger extent than big businesses. Here, we need to make a
distinction between the concept of risk and uncertainty; risk refers to
situation that the use of calculation helps individuals to control that
situation rationally, while uncertainty refers to situation that
calculation cannot be used, and thus, the situation is not fully under
the control of individuals. Davidsson (1992) argues that owners of small
businesses are not less risk averse than others, but instead are more
willing to accept uncertainty. Additionally, Davidsson (1992) means that
small business owners underestimate risk, since they do not use
calculation to support their assessments.
A study done by Binks et.al. (1992) has shown that it is costly for
banks to collect a satisfying amount of information from small
businesses, and therefore it becomes difficult to assess their risk.
Normally, banks apply a formal decision-making process to assess the
risk of businesses. The process of risk assessment consists of
information collection, information procession, information analysis,
decision and a continuous follow-up of the credit worthiness of the firm
(Murray, 1959, cited in Svensson, 2003). Assessment of the
businesses' credit worthiness consists of a judgment about the
businesses' future income and repayment ability as well as a
security judgment (Svensson, 2003). Under transactions-based lending,
the lending decisions are based on "hard" data, such as data
from financial statements, information about the quality of the
available collateral and data about historical numbers (Berger &
Udell, 2002). Hence, decisions under this type of lending require
detailed and quantifiable information (Jankowicz & Hisrich, 1987).
According to Svensson (2003), accounting information constitutes an
important basis for the financial institution's assessment of the
credit worthiness of a business. Furthermore, Bruns (2001) has found
that deficient accounting information is a common reason for the denial
of loans. Bruns (2001) further identified that banks believe that a
business that does not base its decisions on internal or external
accounting information is acting unprofessionally. Accounting
information is required as a basis for the banks' forecasts in
order to reduce the risk of providing funds as well as to ease their
inspection and control of the business (Svensson, 2003). In provision of
credits and rate of interest, banks compare the accounting information
of one business with the accounting information of another business.
Yet, Svensson (2003) found a tendency that the importance of accounting
information decreases as the firm creates a strong relationship with the
bank. Banks that adopt relationship-lending strategy base their credit
decisions on "soft" data, such as information about the
character and reliability of the firm's owner (Berger & Udell,
2002). This information is gathered through regular contacts with the
firm over time. Berger & Udell (2002) further argue that
relationship-lending can help to reduce the information gap of small
firm finance. As a result, relationship-lending is of great importance
for reducing the information gap between small businesses and banks
(Berger & Udell, 2002).
3. ETHNOMETHODOLOGY
In order to understand how small businesses and banks express the
Financial Gap, there is a need to come closer to both parties. In other
terms, it is better to allow that the two parties engage themselves in
explaining the financial situations that they encounter. The method used
here to reach this purpose is called Ethnomethodology. Ethnomethodology
was developed by Garfinkel as a distinctive research method, and, from a
sociological viewpoint. The concept of ethno refers to a particular
group of people who work as a network, while methodology refers to that
particular group's everyday practices as well as the descriptions
of these practices. According to Garfinkel, it must be true that
"members" of a specific society have some shared methods for
achieving social orders and to understand social situations. (Rawls,
2002). The social orders of a group or network is reflected in the
language they use in communication (Blumer 1969). In essence, the term
Ethnomethodology implicates an inductive approach, which is said to be a
systematic study of everyday life that seeks to understand and describe
rather than explain. Coulon (1995) phrases Garfinkel's view of
Ethnomethodology as;
'...the analysis of the ordinary methods that ordinary people
use to realize their ordinary actions.' (Coulon, 1995, p. 2)
Ethnomethodology is a method for exploring the nature of the
interactions between the people, the way they create and perceive
society. Furthermore, it helps analyzing the different methods people
use for accomplish their daily matters. Therefore, the studies performed
under this perspective are aimed at gaining knowledge about the
practical reality of everyday life, how people reason when, for example,
they engage in conversations. This aim can be reached by making sense of
the social reality of the "members" of a group; the
researchers need to speak the same language as the "members"
and follow the rules of the game of that "members". Only by
doing this, the beliefs, behaviours, and commonsense ideas can be
grasped and analyzed. Thus, Ethnomethodologists organize their research
in the background of the assumption that all people are practical
sociologists. (Coulon, 1995) This view can be further illustrated by a
citation, which says that;
'The real is already described by the people. Ordinary
language tells the social reality, describes it, and constitutes it at
the same time.' (Coulon, 1995, p. 2)
The research approach applies two central concepts; indexicality
and reflexivity to conduct the interviews and data collection by
questionaires. The term indexicality says that words are
"indexed" to the situation where they are spoken, why the
words only show their exact meaning in the context of them being
produced. Building further on this, the term reflexivity says that
peoples' way of understanding, grasping and interpreting the social
reality is determined in the exchange of words. Hence,
Ethnomethodologists argue that describing and producing an action is
equivalent, since you produce the action as you describe it. People
adopting the Ethnomethodological perspective can use a wide variety of
research methods. However, these methods have one thing in common; they
all focus on determining what people in different situations do and how
they make sense of reality.
This research is a part of larger research that was designed to
investigate the Financial Gap in regards with the community of small
businesses in the County of Jonkoping. We do not categorize the small
businesses in clusters such as entrepreneurs, family businesses etc. The
reason for this is related to fact that the previous research could not
show that categorization has effect on the definition of the Financial
Gap. In this specific study we attempt to interpret the Financial Gap by
means of Ethnomethodological perspective, assuming that there is a
relationship between small businesses and banks, and that this
relationship is constructed and deconstructed over time by actors who
engage themselves in the process. This way of approaching the Financial
Gap is necessary because the relationship between the two parties has
non-stable characteristics, shaped and reshaped continuously as actors
encounter and interact. Arguably, factors that should normally explain
the Financial Gap are constantly changing, and as a consequence, new
factors become significant.
The main data were collected by using in-depth interviews. The
interviews have been conducted with members of two organizations which
work closely with small firms and they own small businesses themselves;
Almi Business Partner and the Swedish Federation of Business Owners.
These are the largest organizations in Sweden that represent small
businesses. We have also conducted in-depth interviews with
representatives of two, out of the four, main banks in Sweden that
operate in the city of Jonkoping; SEB and Handelsbanken. In addition to
this, we have sent a questionnaire to small businesses within the
Municipality of Jonkoping. The businesses that have participated in the
study are private limited companies, registered between the years
2003-2007, with 1-10 employees. In total, 40 small businesses
participated in our study and answered our questions. The questionnaire
constituted of Likert-style rating, divided into different themes and
was administrated by the use of e-mails.
4. PRESENTATION OF THE EMPIRICAL FINDINGS
As discussed in the previous section, this report is drawn from the
context of a larger report that was oriented to re-interpret the
Financial Gap. The following figures, concepts and themes are
"indexes" that are drawn from a larger mass of empirical
materials. As far as it is possible, we present the Gap as if it is
experienced by respondents. The respondents are actors that are directly
related to the financial situations of the small businesses.
Decision-making
Both the interviews and the questionnaire indicate that accounting
information is not used for decision making in regards with the
conduction of everyday activities. Furthermore, the result from the
questionnaire reveals that 95% of the companies' owners are
directly involved in all types of everyday activities. The illustration
below shows the existence of an informal structure for decision-making.
Together "gut-feeling" and "experience" form a basis
for 77% of all decisions made in the small business. The chart further
shows that accounting information, forecasts, and budgets are used to
support 20.5% of all decisions made.
[FIGURE 1 OMITTED]
The data collected by interviews confirm the same result. One of
the respondents (lending officers of the bank) argues that:
'They base their decision on a feeling; it is a
"gut-feeling" rather than anything else.' (Participant C)
The lending officers emphasized that small businesses lacks formal
structure for their planning. "The owners deal with situations as
they occur rather than relying on a forward-looking plan". In
contrast to this, the banks have a formal decision-making process.
According to both lending officers, the credit decision process consists
of both quantitative and qualitative assessment criteria. Part of the
quantitative assessment is to use a computer based scoring model in
order to classify the companies into different risk categories. The
qualitative assessment, on the other hand, is to a large extent based on
feelings and gathering information about the intangible assets. In a
credit decision process, both lending officers argue that cash flow,
personality of the entrepreneur and collateral are the main determinants
of the loan credits.
Board of Directors
Considering the function of the board of directors in conducting
the businesses, the findings from the questionnaire revealed that 28.6%
of the companies have external members. The questionnaire's result
indicates the board of directors has generally an inactive function for
the development of the small businesses. The activeness of the board was
tested by examining five actions; regularity of meetings, sending out
agendas in advance, preparation of reports, the board's monitoring
of decisions and the board's contribution with useful ideas. These
are illustrated in the graph below.
[FIGURE 2 OMITTED]
Based on the result dawn from the questionnaire, the
representatives of businesses argue board of directors in small
businesses are often formed of family members and friends. In effect,
there are no active board meetings, strategies and decisions are formed
around the kitchen table. The lending officers emphasize the same
result.
'...we assume that they do not have, so to speak, a structured
decision process or an active board, but it is rather the family that
makes the decisions.' (Lending officer C)
Financial Information
The use of financial information in decision varies among different
companies. As can be seen in the chart below, 27% of the respondents
seldom use financial information while 34.9% sometimes use it and 38.1%
use in the major circumstances.
[FIGURE 3 OMITTED]
The level of usage of financial information was indirectly tested
with three questions aimed to capture the routines of using financial
information. The first question captures the use of monthly reports. It
was founded that 52.4% often produce monthly reports. Only the 38.1% of
small businesses provide budgets. Furthermore, only 38.1% state that
they often use financial information as a tool for controlling the
operational units or to compare their units with other units
(benchmarking). In agreement with these results, both representatives of
the small businesses argue that owners of the small businesses do not
give the first priority to the administrative work. As long as the
business runs smoothly and everything is under control, reports are not
considered necessary.
'If one is an entrepreneur then the administrative work is
subordinated to other activities and therefore, one has difficulty of
providing reports. In general the owners of the small businesses are
actually uninterested to do the administrative work'
(Representative B)
'The banks and their business departments are not really
synchronized with the activities of the small business man. Banks are
more synchronized with big corporations which have routines and
financial managers. Maybe they fit better together, than the
entrepreneur and the bank.' (Representative A)
The interviews disclose that financial reports are not easily
accessible in small businesses. Instead, that is something that is
produced in the end of the year or when situations required. The
negative view of the role of financial information does not, however,
mean that it does not exist. Instead, small firms have their own way of
working with financial information.
'They have everything in their head, not in print, and it is
not in numbers... They have a clear picture. They have a complete view
of what would come out in a report. And here we have a gap between the
language of banks and the language of small business man.'
(Representative B)
According to the lending officers, there is a great variation in
preparation of financial information when the owners of small when meet
the bank. In general, the accounting information the banks receive from
small businesses is poor and sometimes the numbers are old and
irrelevant. 'Entrepreneurs live in and breathe with their
companies; it is seldom happen that this group of people loves
papers' (Lending officer D).
Additionally, both lending officers emphasize on the problematic
aspect of the entrepreneurs who have a lot of information in their
heads. 'We need to have something to base our decisions on... the
information needs to be formalized' (Lending officer D). One of the
representatives of the small businesses agrees with the lending officers
that owners of the small business are often unprepared when meeting with
the banks. 'I believe that they are unprepared and naive many
times' (Representative A).
Relation
Small firms' perception of their relation with the banks was
tested through three factors; the bank's familiarity with the
business, the banks' understanding of the firm's needs, and
the firm's trust in the bank. Firstly, only 19.1% of the businesses
claim that the banks are familiar with their business. Secondly, 23.8%
state that the banks understand their needs, and thirdly, 23.9% have a
great trust in their banks. The graph presented below shows that small
businesses' perceive their relation with their banks as
problematic; only 25.1% have considered having a good relationship with
their banks.
[FIGURE OMITTED]
The rrepresentatives of the small businesses emphasize on the need
of a close relationship with the banks. In a closer relationship, the
flow of information will increase and the entrepreneurs become more open
about their businesses. In order to build a close relationship, trust is
a main building block;
'Trust is extremely important. It takes a long time to
establish and it can be eliminated in a second. The word trust should be
framed in gold.' (Representative A)
Additionally, both lending officers believe that a good relation
between the lending officers and the small businesses is important.
Sometimes a good relation, to some extent, can weigh out poor securities
and deficient financial information. On the question regarding what
banks may perceive as problematic in their relationship with small
businesses, the lending officer (C) answered;
'I believe that the big problem really lies in the
communication, they have information in their heads and for them it is
obvious. It is their baby, their whole project. Yet, to get it down in
print, be able to formalize it, so that we can understand it and be able
to use it as a base for our decision, from here, there is a giant leap
between us.' (Lending officer C)
The lending officer emphasized on the "different personal
traits" that affect the parties' relationship. 'There is
a reason for why they are entrepreneurs and why I work at a bank'
(Lending officer C).
5. ANALYSIS AND CONCLUSIONS
The empirical data presented above are indicative of differences in
how the two parties understand the financial situations. There are two
groups of individuals; those who are members of the community of
financing and those who are members of small businesses. These two
groups employ different styles of languages in the presentation of their
financial requirements. A focus on the themes and concepts that used by
each member, portrait some differences in using vocabularies. The
following table presents an interpretive scheme that shows conceptual
differences.
The two different sets of vocabularies and concepts capture, in
fact, the same Financial Gap in terms of two distinctive realities. The
small businesses and banks portrait their respective financial reality
by mobilizing two types of vocabularies. The difference in standpoints
should be related to the use of vocabularies and the fact that the
respondents are members of the two distinctive communities. Banks prefer
organized information in order to be able to calculate the risk of
credit. Information drawn from a risk calculation is relevant for their
decisions. In a loan application, banks classify businesses into
different risk categories which require some kind of universal
benchmark. The calculation activities help them to compare various
credits with one another and provide loans for the less risky unit. The
organized information is also needed because the financial decisions
should be justified administratively. As a result, banks'
information must fulfil the institutional requirements, in the context
of which, their financial operations are justified.
Conversely, the small firms should deal with ambiguous situations.
The situations they encounter are not symbolized in rational terms that
eliminate the ambiguity. By means of trial and error and subjective
judgments, the owners of small businesses carry on their actions and
orient their decisions. Decisions and actions are not separated and
there is not a need for the analysis of the decisions which are
decoupled from actions. They are used to tolerate uncertainty, accept
ambiguity of action, and avoid the cost of calculation and formal
decision making. The owners of small businesses do not need to justify
their decisions administratively; information is only used to guide the
action--not to justify the decisions. Additionally the small businesses
do not need to justify their decisions to the banks, and perhaps this is
the area that creates communicative problem in relationship with the
banks.
The two members differ in thinking; while banks emphasize on the
analytical reasoning, small businesses emphasizes on practical
reasoning. The distinction will be marked more conveniently if we
emphasize that banks are more concern with "decision making"
decoupled from the action itself. While, the small businesses should
deal with action in close relationship with decision, they cannot
separate action from decision. Banks make their decisions preferably
through the analysis of accounting information (decoupled from action).
On the contrary, small businesses make decisions in accordance to what
is happening at the moment, what is the problem, and how it can be
solved practically. The small businesses act and reason intuitively
because in most cases action is not analytically understandable. The
true entrepreneurs should trust their "gut-feeling" because
the situations ahead them, are often difficult to be determined
analytically. On the contrary, members of the community of financing
make decisions about the situations which are determinable; that is to
say that, they have a choice to avoid the ambiguous situations--for
example denial of certain credits that appear to be ambiguous.
Consequently, the two groups speak different languages; banks favours
numbers and analytical tools, and predetermined goals, while the
entrepreneurs present themselves in terms of their future
"visions" and their "experiences".
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Hossein Pashang, Jonkoping University, Sweden
Anna Johansson, Jonkoping University, Sweden
Petra Waldemar, Jonkoping University, Sweden
Marie Nolander, Jonkoping University, Sweden
Figure 5: Interpretive scheme depicting differences in using
vocabularies
Small Businesses act through: Banks decide through:
Ambiguous Information Organized Information
Action-Based Information Decision-Based Information
Practical Reasoning Analytical Reasoning
Intuition & Gut-feeling Risk Calculation
Non--Financial Information Financial Information