ABSTRACT

The financing of small firms has attracted very extensive interest and debate. This chapter first provides a brief description of the scale of small firms finance and some of its key characteristics. In the next two sections the proposition that there are ‘gaps’ in small firms financing – a major concern of much of the literature – is explored. The first of these two sections sketches the historical record of investigations into the financing difficulties faced by small firms in the United Kingdom. The second uses some basic supply and demand analysis to tease out a more precise economic meaning for the notion of a finance ‘gap’. The final section of the chapter briefly examines two related aspects of small firms financing that have attracted interest in recent years: venture capital and the activities of ‘business angels’. The focus in this chapter is on UK experience, but many of the underlying issues are relevant for other advanced economies.