The purpose of this paper is to use univariate statistical analysis to investigate barriers to raising bank finance faced by UK small and medium‐sized enterprises (SMEs), specifically the impact of personal characteristics (ethnicity, gender and education).

A conceptual model was developed and the results of a telephone survey of 400 SMEs conducted (before the “credit crunch”) by the Barclays Bank small business research team were analysed. The survey was based on a large stratified random sample drawn from the Bank's entire SME population.

It was found that education made little difference to sources of finance, except that those educated to A‐level more frequently used friends and family and remortgaged their homes. However, graduates had the least difficulties raising finance. Though statistically insignificant, women respondents found it easier to raise finance than men. The survey confirmed that – and this finding was statistically significant – ethnic minority businesses, particularly black owner‐managers, had the greatest problem raising finance and hence relied upon “bootstrapping” as a financing strategy.

The study makes an important contribution to filling a research gap, given the critical need of policy‐makers to understand differentials between different types of owner‐managers. It brings new insights into its field – access to finance – and with respect, especially, to marginalised groups.

The paper adopts a different approach than many prior studies, with a large sample and robust analysis, to explore a critical need‐to‐know area in a new way – both for policy‐makers and academics in the field of SME finance.

Interest groups seek to influence public policy. Business associations We investigate the influence of gender, ethnicity, and education in the use of external advice and finance by UK small and medium-sized enterprises (SMEs). A conceptual model of ‘discouraged advisees’ was developed as a framework for analysis of the results of a telephone survey of 400 SMEs. We found an association between the use of external advice and the ability to raise bank finance. Furthermore, both men and black and minority ethnic (BME) participants were more likely to use family and friends for advice, whilst women were twice as likely as men to use Business Link. BME business owners were discouraged from using less ‘trusted’ sources, such as Business Link, possibly believing them insufficiently tailored or that they would provide inappropriate advice. Therefore, the findings provide support for our conceptual model of discouraged advisees and have implications for the provision of advice for business owners from BME communities.

The Community Development Finance Association (CDFA) estimates that community development finance institutions (CDFIs) have a loan and investment portfolio of some £150m which levered a further £160m. This is dwarfed by bank lending to SMEs of some £45bn. The question then is what difference does micro-finance make in the UK? Is it really needed? Or would entrepreneurs find finance from other sources if micro-finance wasn’t available? The paper draws on original research amongst the CDFIs in the north east of England, first undertaken in 2004, and updated in 2005. This provides information on the supply side. This is supplemented by research amongst entrepreneurs – to provide insights on the demand side as well. The results show that micro-finance institutions do make a difference, but also show that they are unsustainable without grant support of some kind, and suggest that they are unlikely ever to become sustainable. We find that despite growth in bank lending, there is a gap between demand and supply of finance for small firms. To investigate further, we outline findings from the survey in the north east which suggests that MFIs are unable to earn enough income to be sustainable, in most cases even to the extent of covering their capital losses – at least without significantly increasing the interest rates that they charge. Arguably, however, MFIs provide a social benefit that justifies their need for public sector support. There is considerable variation in the running costs of MFIs, though it is not always clear what is the cost of ‘managing the loan portfolio’ and what are the additional costs of providing mentoring support; nevertheless, it would appear that there is scope for some MFIs to reduce their transaction costs. An interesting question to consider is whether MFIs are likely to become sustainable as they grow larger – though in reality sustainability is a function of the number of clients supported by each member of staff rather than absolute size – but this study did not look at the numbers of staff working for each fund. MFIs should be encouraged to report against common performance measures which would enable more effective benchmarking. More effort needs to be made to promote the availability of microfinance. Finally, it is likely that the real need for a prospective entrepreneur is effective advice and support which will assist in unlocking the necessary financial support so the most effective MFIs, measured by survival and growth of clients, are likely to be those that can provide effective advice and support alongside their loans.