Technovation 33 (2013) 265–275

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Technovation
journal homepage: www.elsevier.com/locate/technovation

Public intervention in UK small firm credit markets: Value-for-money

or waste of scarce resources?
Marc Cowling a,n, Josh Siepel b
a
Exeter Business School, Exeter, Devon EX4 4PU, United Kingdom
b
Science Policy Research Unit, University of Sussex, Brighton BN1 9QE, United Kingdom

a r t i c l e i n f o abstract

Available online 21 December 2012 Loan guarantee schemes are used in many countries to provide financial support to small firms by
Keywords: guaranteeing loans from commercial banks, but questions remain about whether public intervention in
Small business private credit markets to support entrepreneurial firms is justified. This paper examines whether the
Government programs UK Small Firms Loan Guarantee Scheme (SFLG) provides value-for-money to the UK tax payer,
Financing presenting a regression based performance approach which then feeds into a formal cost–benefit
Loan guarantees analysis. Specifically, we consider whether firm performance post-investment is such that it justifies
the governments’ presence in the lending market and the costs associated with it. Our findings suggest
that entrepreneurial firms that are able to access new finance through SFLG achieve superior
performance in the form of improved sales, job creation and exports and that this justifies public
intervention in private credit markets.
& 2012 Elsevier Ltd. All rights reserved.

1. Introduction research agenda by emphasising the key role that government

Bruce Kirchhoff was one of the first scholars in the post-Birch
Job Generation Study period to not only update the job generation
findings of Birch (1979), but add to our understanding of the
relative dynamics of job creation across different size classes of
firm. As a result of his early work (Kirchhoff and Phillips, 1988),
and the consistent evidence that small, and specifically new, firms
create a disproportionately high number of net new jobs, he
became more widely interested in questions around how policy-
makers could support smaller and younger entrepreneurial firms
to maximise their potential to the wider benefit of the economy.
Of particular concern to Kirchhoff was (a) that policy had up
until that point ignored smaller firms, and explicitly the creation
of new firms (Kirchhoff, 1996, p. 628), (b) that rigidities in the
labour market had created barriers that prevented entrepreneur-
ial firms from hiring more workers (Kirchhoff and Phillips, 1988,
pp. 271–272), and (c) that the removal of barriers to new firm
entry was critical to future economic dynamism and growth
(Kirchhoff, 1994, p. 199).
Given the centrality of new firms and smaller firms in general
to job creation and economic growth, Kirchhoff (and his co-authors)
not only empirically justified the role of small firms as an important
agent of economic development, but explicitly shaped the future
n
Corresponding author. Tel.: þ44 78 4186 6228.
E-mail address: M.Cowling@exeter.ac.uk (M. Cowling).
policy could play in supporting or diminishing the ability of smaller
firms to maximise their potential. In this paper we focus on the most
widely used, and long-standing, public policy mechanism world-
wide for supporting small firms: the (partial) credit guarantee
scheme. Examples of these schemes include the SBA 7(a) loan
programme in the US, founded in 1953; the Canadian core guaran-
tee programme (CSBFP), founded in 1961; and the UK Small Firm
Loan Guarantee programme, founded in 1981, as well as pro-
grammes in many other countries, including France, Germany, India
and Korea.
Why are credit guarantee programmes such a widely used
form of policy intervention in developed and developing coun-
tries, and is there an empirical basis for their use? Given that the
growth of small firms is generally constrained by access to
internal capital (Carpenter and Peterson, 2002; Beck and
Demirguc-Kunt, 2006), a common concern raised in the small
business literature is that capital market imperfections exist and
limit the availability of finance to small firms (Laeven, 2003; Love,
2003; Gelos and Werner, 2002). Beck and Demirguc-Kunt (2006)
state that small firm financing obstacles have almost twice the
effect on annual growth than large firm financing obstacles.
Headd and Kirchhoff (2007) express the importance of ‘available
financing’ in allowing small businesses to maintain their role as
major actors in the economic system. This allows them to
continue as a major source of net new job generation (Phillips
and Kirchhoff, 1989). Access to finance is particularly relevant for
innovative firms, which have considerable job creation potential

0166-4972/$ - see front matter & 2012 Elsevier Ltd. All rights reserved.
http://dx.doi.org/10.1016/j.technovation.2012.11.002
266 M. Cowling, J. Siepel / Technovation 33 (2013) 265–275
but suffer from gaps in knowledge and provision of capital,
leading to underfunding (Peneder, 2008). Given that innovation
is a costly (Saemundsson, 2005) and uncertain (Wang et al., 2008)
process, innovative firms tend to be persistently financially
constrained (Westhead and Storey, 1997; Carpenter and
Peterson, 2002).
The sources of capital that firms use to address their financial
needs are therefore important. The ‘pecking order hypothesis’ of
Myers and Majluf (1984) suggests that firms will prefer debt to
equity capital. While forms of equity investment such as venture
capital are commonly discussed in the literature (Cornelius and
Persson, 2006), in practice venture capital-backed firms represent
only a small fraction of the total population of firms—in the US
approximately 0.625% of firms founded in any year will receive
VC (Puri and Zarutskie, 2008), while 55% of firms access debt
capital (Bitler et al., 2001). Consequently, given the high demand
for capital from growing firms, credit is a crucial part of the
funding ecosystem for small firms, including those with innova-
tion activities (Colombo and Grilli, 2007; Aaboen et al., 2006). For
innovative firms, the availability of credit reduces the reluctance
to adopt new technologies that raise mean income levels (Ghosh
et al., 2000), allowing firms to use new technologies that then
facilitate further growth.
This leads us to the key issue surrounding the rationale for
loan guarantee schemes, that of credit rationing. Credit rationing
refers to the phenomenon where some borrowers receive loans
while others do not, all else being equal (Bester, 1985). Given the
importance of credit for firms and their growth, much attention
(see Cowling, 1997) has been paid to credit rationing in the form
of loan denial, what Ghosh et al. (2000) refer to as macro credit
rationing (As opposed to micro credit rationing, which refers to
credit limits (i.e. the amount that firms can raise).). Loan guaran-
tee schemes are predicated on the notion small firms cannot gain
access to (proportionally) as much credit, or credit on equally
favourable terms, as larger firms of equal risk. Concerns about
credit rationing for small firms have led to the widespread use of
loan guarantee programmes throughout the developed (Cowling
and Mitchell, 2003; Riding, 1998) and developing (Klapper et al.,
2006; Honaghan, 2008) world. Almost without exception this
type of intervention in the capital market has sought to provide
loan security to smaller firms who would not otherwise be able to
obtain debt finance through conventional means (Riding, 1998;
Cowling and Clay, 1995). The major benefits of public financing
initiatives have been identified as supporting the validation of
technology (Freel, 1999) and acting as a catalyst for broader
economic development (Wonglimpiyarat, 2006).
Despite this, the existence of credit rationing (and conse-
quently the rationale for loan guarantee schemes) has remained
difficult to clearly identify. The challenge behind public interven-
tion may be viewed in light of Astebro and Bernhardt’s (2003)
framework of Type 1 and Type 2 errors: if a loan guarantee
programme advances a loan to a firm that subsequently fails, this
represents a Type 1 error, indicating that banks made the correct
decision in the first instance not to lend to the firm in the absence
of a loan guarantee scheme. By contrast, government backed
loans which are successfully repaid would, in the absence of a
guarantee scheme, represent a missed opportunity for the bank.
This would be termed a type 2 error. Broadly speaking, if defaults
increase as constrained firms become unconstrained via the loan
guarantee, then banks are, under certain conditions, better off
without a scheme. This occurs as loan guarantees raise the
equilibrium price (via the government interest rate premium)
and volume (number of loans and the total value of loans) traded
in the market. This can lead to a situation where banks are
lending at levels above their profit maximising level (Cressy,
1996; Devinney, 1986; Cowling, 2010). The fact that not all
potential entrepreneurs and/or small businesses get access to
loans is a necessary, but not a sufficient condition, for justifying
public intervention in credit markets.
Crucial to loan guarantee schemes is that bank screening
processes remain in place to avoid risky investments. Riding
(1998) argues that the objective of loan guarantee schemes is to
assist small firms, not to subsidise risky firms. Further, Fraser
(2009) suggests that it is the task of the credit markets to
discriminate according to quality of borrower. For example, firm
size and firm age are often taken to be good proxies for firm risk
(see Beck and Demirguc-Kunt, 2006; Cowling, 1999a respec-
tively). In a world of imperfect (or incomplete) information,
lending institutions often look for easily verifiable factors when
making lending decisions. Empirical evidence reported by
Hyytinen and Pajarinen (2007) finds that when a small business
ages 1 year, its cost of debt decreases by 1–2 basis points.
Importantly, they also find that within firms’ growth of collater-
alisable wealth is not driving this age–cost of debt relationship.
Gregory et al. (2005) find that only firm size is a predictor of
capital structure decisions. Whilst both may be true in a wider
sense, it is also true that within each size and age category of firm
there is a distribution of risk across firms within that group. Thus
the objective of loan guarantee schemes is to facilitate capital
formation for small firms, a contention supported by Green
(2003) and Graham (2004). To this end, the offer of a loan
guarantee by a potential lending bank is made after due diligence
is conducted according to conventional lending criteria.
2. Credit guarantee schemes
In this section we briefly review the empirical literature on
several international loan guarantee programmes, discussing
their effectiveness and impact on small businesses and regional
or national economies. Key to the literature evaluating loan
guarantee schemes is what is termed additionality in the UK,
and incrementality in North America. Additionality refers to the
requirement that guaranteed loans are only issued to borrowers
who had exhausted all other potential sources of loan funding,
and studies addressing this topic generally seek to identify
the additional economic benefit provided by these additional
guaranteed loans.
2.1. Canadian small business financing (CSBF) programme
The Canadian Small Business Financing program (CSBF)
evolved from the original 1961 Small Business Loans Act primary
loan guarantee program. In its current form, the program is
available for any (non-farm) profit oriented business with sales
less than $5 m Canadian, and loans up to $250,000 can be issued.
Loans are limited to term loans, and for the purchase of premises
and equipment, land, or leasing but not working capital. The
guarantee is for 80% of the outstanding balance. Lenders have
complete discretion over the loan approval process.
Riding (1998) focuses on additionality in CSBF, estimating a
loan ‘outcomes’ model to identify which firms successfully
applied for loans and which were turned down based on obser-
vable characteristics. They then apply this approval/turn-down
model to a sample of loan guarantee program borrowers. Their
key finding was that 81% of their loan guarantee sample would
have been turned down for conventional loans, and after further
testing (Riding et al. 2007) amounted to 74.8% additionality.
Further analysis for jobs created suggested that of the 10,000
guaranteed loans per annum, CSBF contributed to an additional
22,000 full-time jobs in Canada each year. This builds on previous
research (Riding and Haines, 2001) showing the guarantee
 M. Cowling, J. Siepel / Technovation 33 (2013) 265–275
scheme to be very efficient in job creation, with a cost of
approximately $2000 per job created (most of which reflects cost
of default).
2.2. US small business association loan schemes
The US SBA loan guarantee is a large-scale programme cur-
rently holding USD 50 billion in assets in over 360,000 loans since
1991. Under its general 7(a) loan programme and its ‘504’
programme more focused on building fixed assets, the pro-
gramme provides partial guarantees to loans from banks.
A series of papers by Craig et al. (2005, 2006, 2007a, 2007b)
from the Federal Reserve Bank of Cleveland focused on how the
US SBA loan guarantee affected local economic growth and
employment. Using panel data at the Metropolitan Statistical
Area (MSA) level, they test whether the 360,000 SBA and ‘504’
loans were associated with higher per capital incomes and higher
local employment. On incomes, they find that SBA loans are
associated with a positive (but small) increase in future per capita
income growth. On employment, they find that ‘if you increased
per capita SBA guaranteed lending in a local market byy
approximately $100 the predicted result is an increase in the
level of employment by 0.8 percentage points’ (p. 26). In localities
with less developed financial markets the effect is higher, and
specifically, ‘guaranteed lending will have a larger positive impact
on social welfare if it is targeted to certain high-minority areas’
(p. 28).
2.3. UK small firm loan guarantee scheme (SFLG)
The empirical context for our paper is the UK Small Firm Loan
Guarantee scheme. The SFLG, established in 1981, was the
government’s primary debt finance instrument until its name
change in 2009. SFLG addressed the market failure in the provi-
sion of debt finance by providing a Government guarantee to
banks in cases where a business with a viable business plan is
unable to raise finance because they cannot offer security for their
debt and/ or lack a track record. This rationale still underpinned
the SFLG at the time of the collection and evaluation of data. In
the SFLG, the government covers 75% of the loan value and
borrowing businesses pay a premium which is 2% over the
commercial bank rate. Over the last decade, take up of the scheme
has averaged around 4500 loans per year, although there have
been fluctuations between individual years. In January 2009, SFLG
was replaced by the Enterprise Finance Guarantee (EFG), which
opened the scheme to a wider number of businesses, with the
specific objective to facilitate new bank lending in response to the
decrease in credit availability associated with the financial crisis.
The SFLG has been analysed in a series of empirical papers by
Cowling (2007a, 2007b, 2008, 2010) and Cowling and Mitchell
(2003). They add some interesting insights into the operation of
the UK SFLG. The latter paper uses data for the 42,316 loans
issued from 1984 to 1998 to estimate the determinants of default
and the timing of it in the context of the theoretical credit
rationing model set out by Stiglitz and Weiss (1981). The key
findings were that default increases with the banks’ cost of capital
(the loan rate) but not with the government premium. In addition,
default was also found to increase in periods of macroeconomic
growth, suggesting that in economic upturns the marginal SFLG
borrower is of lower quality as banks relax their lending criteria.
Collateralisable wealth was found to have no effect, which implies
that entrepreneurial ability is randomly distributed throughout
the population and not confined to the wealthy.
Cowling (2007a) explored the role of loan commitments
(overdrafts) on the UK SFLG as a means of insuring borrowers
against future credit rationing. This relates to micro credit
267
rationing (i.e. limits to amounts firms can access) as identified
by Ghosh et al. (2000). He estimated the determinants of agreed
overdraft limits in a framework related to the theoretical volume
rationing model of De Meza (2002), whereby banks ration firms
by restricting loan amounts rather than explicitly denying lending
proposals, and the credit allocation model of Melnik and Plaut
(1986) under which contract terms can be traded off against one
another. The key findings were that ex post default had no bearing
on initial credit volumes advanced, nor was there an obvious
trade-off between loan margins (risk premia) and loan amount.
But the availability of collateral for firms which wish to borrow
debt under commitment contracts is absolutely crucial to their
ability to raise substantial amounts of funding. Holding all else
constant, not having any collateral reduces a firm’s maximum
borrowing by half. This is supportive of the role of SFLG in
allowing certain types of small firm borrowers to access bank
funding.
In a further two papers, Cowling (2008, 2010) replicated the
Berger and Udell (1992) US loan market study using UK SFLG
data. Broadly, there were nine explicit tests of credit rationing,
divided into two strands. The first strand were categorised as
‘stickiness’ tests and involved testing how bank margins moved
when base rates moved, or how margins differed with loans of
different types. The second strand was categorised as ‘propor-
tions’ tests, and involved testing how banks rationed loans of
different types when base rates changed. On the six stickiness
tests, four results were broadly supportive of credit rationing,
particularly for firms without collateral. But the results on the
three ‘proportions’ tests were inconclusive. The author concluded
that in the presence of the SFLG, credit rationing in not an
explanation consistent with the loan market for most small
businesses in the UK. However, there is a small pool of borrowers
who, due to information problems, will always find it more
difficult to raise bank funds when credit markets are tightening,
even in the presence of SFLG.
We have drawn upon a wide range of theoretical and empirical
literature, including some longstanding seminal contributions
and some recent theoretical and empirical advances, to establish
what we know about key aspects of credit rationing and how it
impacts on the financing of entrepreneurial businesses. In doing
so we have considered what the economic effects of finance
constraints might be, how banks deal with risk and how this
might lead to missed opportunities for viable lending to smaller
businesses. We have also made a case for public intervention
in the form of loan guarantee programmes under certain
circumstances.
3. Objectives and methodology
While the rationale behind loan guarantee programmes is
clear (as discussed above), what is less clear is whether this form
of intervention –while logical – is economically justified in terms
of the benefits provided to the broader economy, particularly in
challenging times for the public sector. The remainder of the
paper explores this topic in the case of the UK SFLG. The main
objective of this research is to provide an assessment of the SFLG’s
impact arising from supported businesses being able to access
loans that they would otherwise not have received. Our examina-
tion has two parts: first we examine the survival and performance
of firms receiving SFLG guarantees, and then we consider the
relative costs and benefits of the scheme to the UK economy.
We first explore the relative survival and performance of SFLG-
backed firms. As discussed above, credit rationing assumes that
there are firms who are able to repay loans but are not able to obtain
capital. We seek to examine this by considering the short-term and
268 M. Cowling, J. Siepel / Technovation 33 (2013) 265–275
long-term survival of SFLG backed firms. We do this using
descriptive analysis for investments from 2006 to 2008, and
regression analysis for long-run survival for loans made from
2000 to 2005. Under conditions of credit rationing we would
expect relatively high survival rates as this would represent firms
that were otherwise unable to raise debt but were otherwise
sound. Building on this, we then compare the performance of
SFLG-backed firms against a matched control group. This regres-
sion analysis allows us to assess the performance of SFLG in terms
of a number of business outcomes including employment change,
sales change and likelihood to export, as a means to under-
standing the impact of the firm.
Research Question 1 (RQ1): Do SFLG backed firms perform
better or worse than otherwise similar firms?
Using this information we then seek to examine whether the
performance of SFLG represents good value for the public sector. We
do this by first using the information about survival from the prior
analysis to derive information about cost, and then examine the
overall cost effectiveness of the SFLG to the Exchequer and the
economy in terms of additional Gross value added (GVA). These
estimates take account of the extent to which businesses would have
obtained finance in the absence of the scheme (finance additionality)
and business deadweight and displacement effects in markets.
Research Question 2 (RQ2): Given default rates and observed
performance of SFLG backed firms, does the SFLG scheme repre-
sent value-for-money or a waste of scarce resources?
Answering these two research questions will therefore allow
us to gain an understanding of the value and impact of public
sector intervention in the credit market.
3.1. Data
To address our first research question, we draw upon two sets
of data. For our long-run survival analysis we use the full SFLG
population of firms for loans taken out between 2000 and 2005. In
total this constitutes 31,425 SFLG backed loans. Using data from
this period allows us to have a fuller longitudinal understanding
of the survival of SFLG-backed firms. However, this dataset is not
sufficient to understand issues of relative performance outlined
above. In order to address the question of relative performance
and value-for-money we need to address the counterfactual and
therefore use a different sample that allows us to compare SFLG
backed and non-SFLG firms.
Therefore, for the other analysis of RQ1 and RQ2 we use a
comparison group methodology to assess the counterfactual
issues by drawing on a sample of SFLG backed and non-SFLG
firms over a 2 year window from 2006 to 2008. This data was
collected as part of a formal evaluation commissioned by the UK
Department for Business Innovation and Skills (DBIS) and it
assessed the outcomes achieved by assisted businesses compared
to what would have happened to those businesses in the absence
of SFLG. The counterfactual was established by constructing a
matched sample to compare the performance outcomes of those
accessing SFLG supported loan as against a sample of similar
businesses not accessing SFLG loans. Matching was done on the
age of business, sector and size at the point of loan issue in 2006.
In total, 1488 businesses including 441 SFLG supported busi-
nesses and 1047 unassisted businesses were surveyed. The SFLG
sample was drawn as a quota sample so as to be representative of
the full SFLG population at that point in time. The effective
sample is 10% of the total SFLG population from 2006. Survey
responses were analysed using a mixture of statistical approaches
including econometric modelling to control for any sample
differences.
This evaluation used businesses’ self-reported assessment of
business performance and scheme impact. For two key output
measures (sales and employment), the self-reported data was
cross-referenced against the Office for National Statistics Annual
Business Register figures. Telephone interviews were conducted
by a specialist survey company during August to September 2008
with businesses who had received an SFLG loan in 2006, alongside
a matched sample of non-users from the general business
population. The comparison sample group was matched to the
SFLG group in terms of company legal status and broad industry
sector (to one level SIC). In total, 1488 businesses were surveyed
including 441 SFLG supported businesses and 1047 unassisted
businesses. The survey was designed to collect information on
additionality including finance deadweight and market displace-
ment amongst SFLG supported businesses and more generally,
growth orientation, employment and sales growth, product and
process innovation, prior labour market history of the business
owner, geographic market focus and internationalisation.
In order to identify the ‘true’ impact of SFLG, it was necessary
to take into account key differences in characteristics between the
sample groups. Although the survey comparison groups were
originally matched to SFLG recipient group it was necessary to
also statistically adjust for this using a three-way weight which
took account of sector, age and initial size of businesses. This
enable businesses that accessed SFLG supported loans to be
‘matched’ to businesses with similar characteristics that did not
receive an SFLG loan.
When assessing finance additionality, the SFLG recipient group
is compared against businesses who received a conventional bank
loan. To assess the wider contribution of the scheme, the SFLG
group is compared to two comparison groups; conventional
borrowers and non-borrowers (Although an additional number
of comparison groups were identified, it was not possible to
analyse these in practice due to small sample numbers.).
The cost–benefit analysis (CBA) is carried out using UK
Treasury Best Practice as highlighted in the Green Book (http://
www.hm-treasury.gov.uk/data_greenbook_index.html.). The cost–
benefit analysis was conducted using findings gathered from
the evaluation survey as well as from Management Information
provided by the Enterprise Directorate of the Department of
Business, Innovation and Skills (BIS), and other, secondary,
sources for tax and benefit data and gross value added figures.
4. Survival and performance of SFLG
As discussed above, the key concern of loan guarantee
schemes is to provide capital to otherwise quality firms who are
not able to access the credit market. In this section we analyse
short-term and long-term survival of SFLG firms and examine
these firms’ performance against a control group.
4.1. Short-term survival
It is difficult to use the data available to estimate short-term
survival of firms receiving loans, which is not aided by the fact
that annual reports list annual figures rather than full cohorts.
Using data from BIS Management Information we were able to
examine a cohort of loans drawn down in Q2 2006 to assess the
proportion defaulting over each quarter of the life of the loan.
Fig. 1 shows the cumulative survival profile of SFLG loans
drawn down in Q2 2006. After 2 years (eight quarters) 73.9% of
the loans issued in Q2 2006 had not defaulted, suggesting 26.1%
had defaulted. From this profile it is possible to estimate the cost
of SFLG loans drawn down in 2006, in the first 2 years of the
scheme, which we will do in Section 5 as part of the cost–benefit
analysis.
 M. Cowling, J. Siepel / Technovation 33 (2013) 265–275 269

firm). Differences in lending institution were also apparent with

the default probability varying by 16.1% between the ‘worst’ and
‘best’ banks. But the impacts of loan bundling (SFLG as part of a
multiple loan package including a collateralised conventional
loan) did not influence default. Taken as a whole, our findings
suggest that the government has the potential to significantly
affect default rates, the prime determinant of the schemes cost, by
altering the eligibility criteria and hence the types of firms who
use the scheme Table 1).

Fig. 1. SFLG loan default profile.

Source: BIS Management Data. 4.3. Comparative performance analysis

4.2. Long-run risk of default
An issue with the data described above is that at the time of
collection, a high proportion of the loans issued under SFLG had
not reached maturity and of those that would not reach their final
term many still had not defaulted. But understanding what drives
default is important as this substantially affects the cost to
government of running the scheme. Lessons from default can
provide further guidance for scheme enhancement in the future.
To tackle this issue we refer to the full SFLG population data for
the loan issue period 2000–2005. As the data is drawn from
government management information records (MI), we do not
have the additional set of variables collected as part of the full
evaluation, but core firm level demographics are available for
Next we focus on comparative short-run performance of SFLG
backed firms and our control group firms. Given that we do not
have access to the range of variables for the long-term analysis
above, we focus on the short-term impact. We use three core
measures to capture general performance over the 2 years follow-
ing loan issue, 2006–2008. These are (a) employment change,
(b) sale change, and (c) exporting propensity. These first two
measures are central to our subsequent cost–benefit analysis. The
final measure captures potential additional benefits to the UK
economy derived from selling goods and services in international
Table 1
Loan default model.

analysis including loan purpose, loan term, loan size, industry, age Loan default (marginal effects)
of firm, sales, employment, geographic region, lending bank, legal
form, and a measure of labour productivity. dF/dx z-stat Sig.
The default probability model is estimated by a probit model
Loan amount, £s 0.0000  0.06
as default is a binary outcome coded 1 if the loan ended in default
Loan term (months) 0.0005 5.23 nnn
and zero otherwise. For the total SFLG population over this period, Legal form (ref. ¼co-op)
2000–2005, the default rate is 28.1%. For ease of interpretation Ltd 0.7363 8.09 nnn
the marginal effects are reported. The basic default model is thus Ltd partnership 0.7639 7.54 nnn

Default [1,0] ¼F(loan amount, loan purpose, loan term, loan Partnership 0.8801 7.31 nnn
PLC 0.7629 6.45 nnn
year, collateralised loan bundle, base rates, GDP growth, lending Sole trader 0.9336 7.77 nnn
institution, labour productivity, industry sector, geographic Loan purpose (ref. ¼working capital)
region, age of firm, legal form) Plant/fixed assets  0.0574  5.57 nnn
The ‘typical’ SFLG backed firm in the sample period has a loan Premises  0.1284  12.67 nnn
Other  0.0711  9.88 nnn
of £78,109 with a term of 70 months. The majority of firms have
Region (ref. ¼North East)
limited liability status, 75.7%, and 27.9% are newly established North West 0.0238 1.19
firms. Average labour productivity is £69,790 per employee. More Merseyside 0.0358 1.29
than half of all firms have a bundle of loans associated with their Yorks & Humber 0.0181 0.91
SFLG loan and in total 30.3% of firms have a collateralised West Midlands 0.0254 1.29
East Midlands 0.0424 2.09 nn
conventional loan running alongside their SFLG backed loan. At South East 0.0313 1.66 n
the sector level, manufacturing, 27.9%, and construction firms, East 0.0369 1.87 n
27.1%, tend to have a disproportionate share of SFLG loans. Base Greater London 0.0373 1.88 n
rates averaged 4.62% over the period. South West 0.0011 0.06
Scotland 0.0106 0.51
The key findings from the default model are that there is a
Wales 0.0240 1.11
positive relationship between the initial loan term (expressed in Northern Ireland  0.0478  0.65
months) and subsequent default, but no relationship between Stage of firm (ref. ¼ new)
loan amount and default. Longer term loans increase the prob- Existing  0.0899  4.85 nnn
ability of default by 0.6% for every additional year until loan Established 0.0083 0.45
GDP growth  0.0154  1.16
maturity. In contrast, firms with higher labour productivity (i.e. Base rate  0.0084  0.84
more efficient firms), on average had lower default rates. The Conventional loan  0.0116  1.57
marginal effect implies that for every 1% increase in labour Secured loan 0.0052 0.80
productivity, the probability of default declines by 0.5%. Neither Year of loan (ref. ¼2000)
2001  0.0126  0.87
the state of the macroeconomy or the general cost of borrowing
2002  0.0535  2.41 nn
impacted on default. This, in itself, suggests that firm character- 2003  0.0823  3.55 nnn
istics fundamentally determine loan default. On firm age, we find 2004  0.1176  6.68 nnn
that existing, but young, firms (1–2 years old) were the least 2005  0.2038  13.35 nnn
likely to default. The probability was 9.0% lower than that for new Labour productivity, £ 0.0000  2.28 nn
No. obs 21.967
start-ups and older firms. Sole traders and partnerships (i.e. those
Pseudo R2 0.0766
firms without limited liability) had the highest default rates
(19.7% and 14.4% higher probabilities than a limited liability Significance: n ¼ 0.1; nn
¼0.05; nnn
¼ 0.01.
270 M. Cowling, J. Siepel / Technovation 33 (2013) 265–275

markets. The key variables to be included in our performance
models are as follows:
 Firm characteristics—legal status, age, industry sector, size, region.
 Entrepreneur characteristics—previous labour market status,
management qualifications, financial qualifications, prior busi-
ness experience, prior entrepreneurial experience, gender, and
ethnicity.
 Ownership characteristics—board size, non-executive directors.
The ‘typical’ firm in the sample was 6.5 years old in 2006 and
had 6.2 employees. About 37.1% of entrepreneurs had previously
started a business and this experience averaged 5 years. About
88.9% were previously in waged employment or self-employed.
Boards of directors were typically small, averaging 2.2 directors,
although 15.4% of boards had a non-executive director. 44.3% of
boards had a female director and 13.1% a director from an ethnic
minority. Only 16.3% of directors had a financial qualification and
22.1% a management qualification.
For the employment and sales change models we estimate our
models by OLS using robust standard errors. The exporting model,
as it is expressed in binary form [1,0] for whether a firm exports,
is estimated as a probit model, for which we report the marginal
effects. The SFLG scheme effect is estimated by a simple dummy
variable coded 1 if the firm has an SFLG loan and zero otherwise.
The basic model can be written thus
Performance (2006–2008) ¼F (firm characteristics, entrepre-
neur characteristics, ownership characteristicsþSFLG dummy).
On employment change between 2006 and 2008 we find that
the median SFLG firm grew its employment by 0.42% compared to
 0.13% (i.e. a loss of jobs) in the comparison group firms Table 2).
In contrast, the average employment growth for SFLG and control
firms was 1.51% and 2.15% respectively. This implies that employ-
ment growth is less concentrated (more equally distributed)
amongst SFLG firms over time, and generally higher. For real sales
change (i.e. adjusted for general increases in price levels), between
2006 and 2008 we find that the median SFLG firm grew its
employment by 0.31% compared to 0.0% (i.e. no change) in the
comparison group firms. In contrast, the average for SFLG and
control firms was 1.82% and 2.23% respectively. This implies that
sales growth is less concentrated (more equally distributed)
amongst SFLG firms over time, and generally higher. Finally, we
note that SFLG firms had a higher propensity to export than
control firms, 23% compared to 16%. Thus the raw evidence
suggests that SFLG is associated with generally superior perfor-
mance on key measures such as employment (job creation), sales
growth and internationalisation. This is consistent with two
general concluding points of Bruce Kirchhoff’s body of work in
that small firms do create jobs and contribute to general economic
growth, and also that policy intervention to promote jobs and
growth can generate positive outcomes. It is also important here
to remember that the final year of performance was the start of
the deepest economic crisis for 70 years.

Table 2
Comparative performance models.

Employment change Real sales change Exporting propensity

b t-stat Sig. b t-stat Sig. b z-stat Sig.

Start employment size  0.0819  7.0100 nnn 0.0000 0.0000 nnn 0.0001 0.0700
SFLG 0.4064 7.1200 nnn 0.1589 5.0100 nnn 0.0878 3.6400 nnn
Firm age 0.0081 2.9200 nn  0.0017  1.3200 0.0016 1.4600
Ltd liability 0.0528 0.7900 0.0075 0.1900 0.1357 4.8200 nnn
Sector
Construction  0.0059  0.0500 0.2198 3.2700 nnn  0.1368  3.7900 nnn
Services 0.0615 0.9300 0.0255 0.6800  0.1727  6.2600 nnn
Region (ref¼ North East)
North West  0.0261  0.2000 0.0572 0.8200  0.0066  0.1200
Yorkshire & Humberside 0.1739 1.1300 0.0336 0.4000 0.0870 1.2300
West Midlands 0.0461 0.3400  0.0626  0.8700 0.0613 0.9800
East Midlands 0.0973 0.6400  0.0889  1.1000 0.0258 0.4000
East 0.0420 0.2700 0.0815 0.9400 0.0920 1.2000
South West 0.0631 0.5000 0.0450 0.6500 0.0100 0.1800
South East 0.1365 1.1000 0.0001 0.0000 0.0731 1.2600
Greater London 0.1316 0.9900  0.0219  0.3100 0.0316 0.5300
Wales 0.2528 1.6500 n 0.0274 0.3200  0.0536  0.8300
Scotland 0.2281 1.5500 0.0346 0.4400 0.1396 1.9300 n
Northern Ireland 0.0960 0.4100  0.1359  0.8700 0.0373 0.3600
Other  0.0612  0.1800 0.1732 0.8200 0.1803 1.2300
Ownership
Number of directors 0.2992 13.3000 nnn 0.0213 1.7800 n 0.0115 1.0400
Non  executive director 0.4309 5.6200 nnn 0.0758 1.8100 n 0.0571 1.7800 n
Female directors  0.2420  6.7400 nnn 0.0025 0.1200  0.0204  1.3100
Ethnic directors  0.0466  1.0100 0.0243 0.7200  0.0376  1.7100 n
Management qualifications  0.0661  1.0000 0.0176 0.4800 0.0161 0.5600
Finance qualifications 0.0161 0.2200 0.0253 0.6100 0.1167 3.4800 nnn
Business experience years 0.0429 2.5000 nn  0.0185  1.7800 n 0.0109 1.5000
Previous Start  up  0.0303  0.5200  0.0459  1.3900 0.0385 1.5800
Prior labour market status
Working  0.0522  0.8000 0.0046 0.1200  0.0253  0.9200
Self-employed  0.2272  1.3000 0.1738 1.4900  0.1162  2.0300 nn
Unemployed 0.0295 0.1900 0.0766 0.8300  0.0053  0.0900
Inactive 0.2514 1.8200 n 0.0757 0.8800  0.0015  0.0300
Constant  0.4190  2.7500 nnn 0.2924 3.4900 nnn
No. obs. 1248 788 1258
Prob 4 F 0.0001 0.0001 0.0001

Significance: n ¼0.1; nn
¼0.05; nnn
¼0.01.
 M. Cowling, J. Siepel / Technovation 33 (2013) 265–275
The first point of note from our employment and sales change
models is that the SFLG dummy variable is positive and signifi-
cant in both. The respective coefficients (0.41 and 0.16) imply that
the SFLG has a stronger effect on employment change than sales
change. There is also a substantial degree of consistency in terms
of what are the key variables associated with employment and
sales change. For example, initial firm size is negatively associated
with subsequent growth in both models. This implies that smaller
firms grow faster. On sales change, it was also the case that
construction firms grew more than firms in any other sectors.
Employment change was also positive associated with initial age
of firm. In terms of entrepreneurs’ characteristics, we observe that
previous labour market status had no effect, nor did managerial or
financial qualifications (measures of formal human capital). Prior
business experience had different effects, being positively asso-
ciated with employment growth, but negatively associated with
sales growth. Ownership characteristics were found to be impor-
tant, with a positive growth association for firms with larger
board size and non-executive directors. These two variables could
capture informal human capital elements and aspects of social
capital. Again the association with employment change was of
greater relative magnitude than was the case for sales change.
The exporting propensity model has a richer set of associations
between firm, entrepreneur and ownership characteristics than
was the case for sales and employment change. However, we also
find that SFLG firms, in general, had a significantly higher
probability ( þ8.8%) of exporting. Firms with limited liability
had a 13.7% higher probability of exporting, whilst service sector
and construction firms had a 17.3% and 13.7% lower probability
(than manufacturing firms). Entrepreneurs who were previously
unemployed were 11.6% less likely to be exporters, but those with
a financial qualification were 11.7% more likely to be exporters. In
terms of ownership characteristics, firms with non-executive
directors had a 5.7% higher probability of being exporters. In
general, these findings are consistent with human capital based
factors (both formal and informal measures) being important to
internationalisation captured here by exporting propensity.
We began our empirical analysis by seeking to establish how
many SFLG loans default and what drives this default rate. We
then sought to provide evidence to support or refute the question
of whether SFLG backed firms perform better or worse than
otherwise similar firms on objective criteria. On our first research
question we have established that (a) default rates are high, and
(b) we can identify specific types of firms that are more likely to
default. We have broadly established that SFLG backed firms have
recorded better performance, at the univariate and multivariate
level, across three alternative measures, employment, sales and
exporting. We now consider our second research question, which
asks whether or not this firm level performance translates into
value-for-money for the UK economy given the costs. This is
addressed by a formal cost-benefit analysis in the next section.
5. Cost–benefits analysis of SFLG
In this section we explore the value-for-money proposition
posed by SFLG, specifically whether the overall benefit from the
scheme outweighs the costs of default. We begin this section by
calculating the costs for the scheme, and then perform cost–
benefit analysis using a number of variables.
5.1. Costs of SFLG
The main cost to Government of SFLG is meeting the cost of
loan defaults. The 2007/2008 SFLG annual report showed the total
amount paid out by the Government on demands from SFLG loan
271
defaults was £69.3 million in 2007/2008. This resulted from 1759
loans that defaulted with an average cost of £39,410. Recoveries
arise when a lender’s demand against the SFLG guarantee has
been settled and the lender subsequently recovers funds from the
borrower, which may occur following liquidation of businesses
assets. During 2007/2008 BIS recovered previous demands with a
total value of £1.2 million, or around 2% of the demand settlement
payments made in the year. However, as mentioned in Section 4.1
it is difficult to calculate the annual impact, so it is useful to
examine 1 year’s investments.
The exact number of new SFLG loans made in 2006 (calendar
year) was 3100, with an average value of SFLG loans made in 2006
of £79,500 (US$120,000). The estimated gross default cost of the
810 SFLG loans drawn down in 2006 that did not survive up to
quarter 9 (i.e. more than 2 years) is £41.8 million (The Govern-
ment guarantee covers 75% of the value of the remaining loan
value.). To estimate the net cost of default, administration costs
incurred by BIS need to be taken into account and the costs need
to be offset from the revenue generated by the BIS premium
income (2% of the outstanding balance paid quarterly.). Adminis-
tration costs are estimated to be around £1 million, whilst the
premium income is £7.8 million. This suggests the net costs of
SFLG to BIS are £35 million (US$53 million) over the first 2 years
of the programme of loans taken out in 2006 Table 3).
These costs can be considered as interim as they relate to the
first 1.5–2.5 years of the duration of the SFLG loan received in
2006. SFLG loans can last up to 10 years with the mean average
loan being 8 years and median loan term 6 years. Therefore, the
costs that are estimated are not the entire costs. In practice, this
disadvantages the benefits from the scheme as defaults are likely
to peak in the first 2 years of the programme but benefits are
likely to continue going forward.
5.2. Cost–benefit analysis
The benefits of SFLG to recipient firms relate to (1) net jobs
created, (2) net increase in sales (and GVA), (3) net gains in
productivity, and (4) net increase in export earnings. The full costs
of the government providing this form of support relate to
administration and cost of defaults. Table 4 provides a summary
of the main findings.
However, the economic benefits are likely to be an under-
estimate of the full benefits because: (1) the evaluation only
considers the benefits and costs over the first 2 years since
businesses received an SFLG loan. Costs are likely to peak in year
two but benefits are likely to be ongoing into the future; (2) only
conservative assumptions are used, for instance median rather
than mean average effects, and programme costs reflect net cost
to BIS rather than net cost to government. Revenue flow backs to
the Exchequer attributed to additional jobs created are substan-
tial and are estimated at around £7 million per annum; (3) any
benefits from businesses that defaulted within the first 2 years
are ignored; (4) wider benefits such as the positive externalities
arising from using cutting-edge technology are not quantified;
Table 3
Summary table of net SFLG costs to Exchequer
(financial figures in parentheses indicate a cost to
government).
Item £
Cost of called in guarantees (41,799,000)
Administration costs (1, 000,000)
Premium income 7,772,000
Net SFLG costs (35,027,000)
Source: BIS Management Data.
272 M. Cowling, J. Siepel / Technovation 33 (2013) 265–275

Table 4
Economic cost and benefits.

Item Estimated unit Benefits per £1 incurred

and cost per job created

Costs
Net Exchequer cost of default and scheme administration adjusted £35,027,400
for premium income
Benefits
Net jobs created (excluding entrepreneur) 3550–6340 £5560–£9933 per job
Net additional sales £74,812,000–£149,625,000 £2.12–£4.14
Net additional gross value added multiplier (0.329) £24,613,000–£49,103,000 £0.70–£1.40
Net additional labour productivity £10,958,000–£21,917,000 £0.32–£0.62
Net exporting (per annum) £32,695,000 £0.93
gross economic benefit £36,779,000 £1.05
Net economic benefit (based on the midpoint of £1.05 for net additional £1.75 million £1.05
GVA multiplied by the net exchequer cost of SFLG adjusted for this net
exchequer cost) equivalent to a net return of þ 5%

Table 5 trading immediately, all of their sales would be taken up by a UK

Employment change. based company within 1 year) and their activities are not
displacing other businesses, which leaves benefits accruing on a
Variable Mean per Median per
business business total of 1268 businesses.

Total employment change per additional þ 7.1 4.0

non-displacing business
Per cent attributed to SFLG:
60 4.3 2.4
70 5.0 2.8
80 5.7 3.2
Annualised at midpoints 2.5 1.4
and (5) the evaluation relates to a time when the ‘‘5 year rule’’
was in operation which restricted SFLG to businesses aged less
than 5 years old. Younger businesses have a higher probability to
default than older businesses, leading to higher scheme costs. The
5-year rule was reversed by the 2008 Enterprise Strategy.
It is also important to note that this evaluation relies on
business owners’ self-reported outcomes and assessment of the
scheme’s impact rather than using administrative measurements
of business performance. It is acknowledged that business owners
may not be able to give a completely accurate assessment, but this
issue is common in all business support evaluations and careful
questionnaire design attempts to minimise this. Further, the key
survey data for employment and sales was cross-references against
official Company House Annual Reporting data and the raw
correlation was 0.92. The default data is derived from official
sources and represents a call by a lending bank on the UK Treasury.
5.2.1. Economic additionality methodology
It is important to acknowledge that the economic evaluation
assesses the effectiveness of the scheme by assessing the addi-
tional benefits that would not have occurred in the absence of the
programme and off sets them against the gross costs of running
the scheme. In actual numbers, of the 3102 SFLG supported loans
made in 2006, 26% (810) defaulted within 2 years of issue. This
leaves a ‘live’ business total of 2292 businesses. Of these busi-
nesses only 55% are finance additional. (Not all SFLG supported
businesses could be categorised as finance additional as some
indicated that other alternative sources of funding were available
to them at the point at which they accessed their SFLG loan. The
actual proportion of non-finance additional SFLG borrowers was
16.5% and so these businesses are excluded from the benefit side
of the calculations. The estimates also excluded cases of market
displacement if SFLG businesses indicated that if they ceased
5.2.2. Net jobs created
The mean and median change in the number of jobs between
2006 and 2008 was estimated for additional businesses (i.e.
finance additional and non-displacing businesses). The mean
average employment change is 7.1 (full-time equivalent jobs),
whilst the median employment change is 4.0 (full-time equiva-
lent jobs) per SFLG supported business over the 2 year period.
However, not all the job creation can be attributed to the SFLG
loan. To adjust for this the survey asked businesses to indicate the
relative contribution they felt that their SFLG loan made to their
performance change over the period. The relative contribution
was found to be in the bounded category of 60–80%. The net
contribution is calculated at the lower bound, midpoint, and
upper bound of the relative contribution band Table 5).
From the employment change table, the net contribution to
employment growth between 2006 and 2008 of SFLG backed
loans can be estimated and is within the bounds of 2.80 and 5.00
(full-time equivalent) jobs. This figure can then be multiplied by
the 1268 businesses in the total SFLG portfolio for 2006 which are
finance additional and non-displacing. This gives an estimate of
between 3550 and 6340 extra jobs (or 1775–3170 extra jobs per
annum).
To provide some context, the last full SFLG evaluation (KPMG,
1999) estimated mean additional employment as falling within a
range of 0.3 (assuming very high displacement) to 2.4 (assuming
no displacement). Other employment growth studies have
reported annualised jobs created per business ranging from 0.64
in deprived areas to 7.0 in instrument electronics, although the
typical value lies between 1.15 and 2.75 (see Westhead and
Cowling (1995) for a review of early studies and Meager et al.
(2003), for a more recent review). This might suggest that SFLG is
attracting more growth-orientated businesses.
5.2.3. Net sales change
Median sales change (in finance additional and non-displacing
businesses) over the 2 years is estimated at £295,000 per SFLG
supported business, but not all this sales growth can be attributed
to the SFLG loan. In this case the relative contribution was found
to be in the bounded class of 20–40%. Three figures are presented
using 20% for the lower boundary, 30% as the midpoint and 40%
contribution for the upper boundary.
 M. Cowling, J. Siepel / Technovation 33 (2013) 265–275
Table 6
Sales change.
Variable Median per
business
Total sales change per additional þ non-displacing £295,000
business
Per cent attributed to SFLG:
20% £59,000
30% £88,000
40% £118,000
Annualised at midpoints £44,000
Table 7
GVA change.
Net additional sales £74,812,000–£149,625,000
Net additional gross value added multiplier £24,613,000–£49,103,000
(0.329)
From the sales change table, the net contribution to sales
growth between 2006 and 2008 of SFLG backed loans is estimated
to be within the bounds of £59,000 and £118,000 per business.
This can be multiplied by the number of businesses that are
financial additional and non-displacing (1268). This gives an
estimate of between £74,812,000 and £149,624,800 extra sales
for SFLG over 2 years from loans taken out in 2006 (or
£37,406,000–£74,624,800 extra sales per annum).
To provide context, the previous evaluation (KPMG, 1999)
generated an additional sales estimate of between £16,900 and
£29,500 per business, less than the annualised estimate of
£44,000 reported in Table 6.
5.2.4. Gross value added (GVA)
From the sales change table, it is also possible to derive and
estimate GVA (GVA represents the incomes generated by eco-
nomic activity and comprises: (a) compensation of employees
(wages and salaries, national insurance contributions, pension
contributions, redundancy payments etc); (b) gross operating
surplus (self-employment income, gross trading profits of part-
nerships and corporations, gross trading surplus of public cor-
porations, rental income, etc).) based on ratios drawn from the
Annual Business Inquiry which are disaggregated by size class of
business. (Although it is possible to estimate GVA directly by
asking businesses about wage costs and profits, this evaluation
used a simpler approach by deriving it from reported sales
turnover. This is consistent with other evaluations in this area.
It is not known which approach may be more accurate.) The
relevant ratio (of GVA to sales turnover) is estimated at 0.329 for
SMEs, and the bounded additional sales figures are adjusted
accordingly.
5.2.5. Net gains in productivity
The median change in labour productivity between 2006 and
2008 (in finance additional and non-displacing businesses) is
£43,211 per SFLG supported business. Again not all performance
changes can be attributed to the SFLG loan but as labour
productivity is a derived variable, this information was not
generated from the evaluation survey. In this case the relative
contribution for sales change, which was found to be in the
bounded class of 20–40% was used. So of the total labour
productivity change per business, only 20–40% was attributed to
the SFLG Table 7).
273
Table 8
Labour productivity change.
Variable Median per business
Total labour productivity change per additional £43,211
þ non-displacing business
Per cent attributed to SFLG:
20% £8642
30% £12,963
40% £17,285
Annualised at midpoints £6482
The net contribution to labour productivity growth between
2006 and 2008 of SFLG backed loans is estimated to be within the
bounds of £8642 and £17,285 per additional business. This figure
can then be multiplied by the 1268 finance additional and non
displacing businesses in the SFLG portfolio for 2006, which gives a
bounded estimate of between £10,958,000 and £21,917,000 extra
labour productivity (or £5,479,000 to £10,958,000 extra labour
productivity per annum). This general productivity enhancing
effect of financial capital is consistent with earlier, UK based,
empirical work on small business production functions (see
Cowling and Mitchell, 2003) which showed that the majority of
small businesses need to grow to become more efficient Table 8).
6. Conclusion
Two of Bruce Kirchhoff’s major contributions were to
(a) justify and quantify the important contribution of smaller
and younger firms to job creation and general economic devel-
opment, and (b) argue that government had a key role in
maximising the potential of entrepreneurial activity. In the light
of this, most developed and developing countries have some form
of loan guarantee scheme to support private sector commercial
lending to smaller entrepreneurial businesses. The underlying
rationale for providing such schemes is to promote and support
economic development through maximising the potential of the
entrepreneurial sector of the economy. In itself this is surprising
given that commercial credit markets are often perceived to be
the most efficient form of capitalist market. Implicitly, bankers
are often assumed to be efficient processors of business informa-
tion and it follows that loans only flow to entrepreneurs with
viable business propositions. In reality, as we can observe in the
current financial crisis and in previous crises, this is not always
true. But even if it were, there is still a case to be made for public
sector intervention if the wider economic (and sometimes social)
benefits outweigh the net costs of an intervention. And, impor-
tantly, a government’s objective function can differ from the
bank’s narrower objective function, and this can create a ‘gap’ in
the lending market. The UK SFLG is one such example of a public
sector intervention in the commercial loan market to address this
gap. It then becomes an empirical question whether or not we can
justify this intervention on the basis that the net benefits to the
UK as a whole outweigh the costs of intervention. Our paper
examines this question in detail.
We find evidence that loan guarantee schemes, if designed
well, can have considerable positive impact on firm performance
and the broader economy. Even with conservative assumptions,
SFLG is found to have a net benefit to the economy over the first
2 years of businesses receiving an SFLG loan. There will be
additional benefits lasting beyond the initial 2 year time period,
and consequently this assessment underestimates the potential
benefits from the scheme. We are led to conclude that the UK
SFLG is well targeted, with more than three-quarters (76%) of
274 M. Cowling, J. Siepel / Technovation 33 (2013) 265–275
SFLG supported loans being finance additional in the sense that
these businesses could not have accessed conventional bank loans.
Aggregated to the whole SFLG population, this would imply that
around 2400 additional small businesses got loans in 2006 than
they would have in the absence of the scheme. In the absence of
SFLG, this would have resulted in around half of their intended
investment projects not proceeding, and significant numbers
being scaled down or delayed. This suggests that SFLG has
removed the credit constraint from previously constrained busi-
nesses, levelling the playing field and allowing them to compete
and perform as well as (or superior to, in terms of introducing new
technologies) unconstrained businesses. Furthermore, we find that
SFLG businesses are more likely to be looking to grow, suggesting
that further benefits may accrue in the future.
However, the provision of SFLG has costs associated with it, in
particular the cost of loan defaults covered by the Government
guarantee. These are substantial (£35 million over the first 2 years
of the programme of loans taken out in 2006). To quantify
whether the economic benefits outweigh the costs of the scheme
a detailed cost–benefit analysis was conducted. The evidence
presented using this approach suggests that SFLG supported
businesses generate substantial levels of additional sales and jobs
compared to what would have happened in the absence of the
programme.
Central estimates suggest that for every £1 spent on SFLG the
additional sales attributable directly to SFLG would be around £3.13
(totalling £112 million), of which £1.05 would be gross value added
(totalling £37 million). This is positive suggesting there is an overall
benefit to the economy of operating the SFLG scheme.
The directly attributable increase in net employment is around
2292 at a cost of £7750 per job. Although the costs to BIS of
running SFLG over the first 2 years are estimated to be £35 mil-
lion, taking into account revenue flow back from additional
taxation, the net cost to government of running the scheme is
£23 million.
Ultimately our findings mirror Bruce Kirchhoff’s contributions
by presenting the important role that government can play in
small firm growth. Our evidence from SFLG suggest that the
scheme is successfully targeted at smaller businesses who, on the
whole, have viable lending propositions and who could not access
conventional bank loans due to problems of collateral and, to a
lesser degree, track record. This suggests that loan guarantee
programmes represent viable options that promote access to debt
finance to constrained smaller businesses.
The specific lessons that may be learnt from this analysis
depend on the policy objectives. If the government’s primary
objective was reducing the default rate (the main element of
scheme cost) then excluding firms who are using loan for cash-
flow and working capital purposes would have a large and
beneficial effect as firms that are using loans to invest in tangible
productive assets have a much lower default rate, and a greater
potential to generate long-term benefits to productivity and
positive economic multipliers down the supply-chain and in
capital goods manufacturers. They would equally have more
assets to secure against future loans. If the government’s main
objective is job creation then directing SFLG towards the smallest
firms is the best option. But if the over-riding policy objective is
directed at growth and balance of payments through exporting,
then the scheme should be explicitly targeted at larger SMEs. In
the current environment with a general fall in asset prices, loan
guarantee schemes are likely to become a more important
component of general bank lending to smaller firms. The more
wide ranging conclusion is that the scheme in general creates
positive economic effects, but with more fine-tuning it can be
adjusted to deliver different policy objectives as the government’s
objectives change in response to different economic conditions.
Ackowledgements
This paper is based on work that was originally funded by the
UK Department of Business Innovation and Skills (2010). The
authors are grateful to James Phipps and Daniel van der Schans,
UK Department for Business Innovation and Skills, the Editor of
this journal, and the referres for insight and comments. The usual
disclaimers apply.
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