Financing Ethnic Minority Businesses

Financing of ethnic minority firms - focusing on Asian

Perspective

1. Background to the Study

The significance of ethnic minority firms in the United Kingdom has witnessed a tremendous increase in recent times with ethnic minority communities now constituting a significant portion of the small business sector[1]. Reports from the Bank of England[2] confirm that 5% of the national population accounts for 9% of new business start-ups and 7% of the total business stock in the United Kingdom. This implies that ethnic minorities account for 91% of new business start-ups and 93% of total business stock in the United Kingdom.

An interesting issue in the numbers is that most of the ethnic minorities are engaged in low-order retailing and services as well as other unprofitable sectors of the market[3]. These activities are relatively easier to enter and demand very low financial and human capital requirements[4].

Asians, including Indians, Chinese, Bangladesh and Pakistani constitute a great proportion of the ethnic minorities in Britain as well as a significant potion of the ethnic minority business community in Great Britain. Basu[5], in a study examining the role of informal and formal institutional support in Asian entrepreneurial expansion in Britain suggest that both formal and informal institutional support have played a limited role in fostering Asian entrepreneurial expansion in Britain. Despite the availability of bank finance, rapidly growing Asian businesses did not rely on bank finance either at start-up or for expansion[6]. Basu attributes these findings to the short-term perspective of banks.

All businesses need sufficient funds at start-up to enable them succeed, grow and be profitable in the long run. Capital investment, product and service development as well as marketing costs need to be covered. Businesses fund much of their initial funding from their own resources but have specific needs at a given point in time in the course of their business. Most small businesses tend to rely on loan finance and overdrafts from banks, with equity investment often necessary to enable considerable expansion[7]. According to renewal.net Overview[8], quoting Policy Action Team 3 (PAT3) on Entrepreneurial and Social Exclusion there are general barriers to raising funds faced by small and medium sized enterprises (SMEs) whatever their location. Small and medium size enterprises are regarded by banks as involving higher risk and monitoring costs than other larger investments such as equity investments. As a result small and medium sized enterprises face additional difficulties in deprived areas as follows:

• Funders may regard businesses in these areas as higher risk, since they rely on fragile local demand, may be less well capitalised (i.e., have less of their own funds to cover their requirements) and offer limited collateral – assets which can cover losses to the funder should the business fail. (An example of collateral is that part of the value of a house which the owner owns outright and is not subject to mortgage.)
• The price of mainstream finance may be prohibitive, even if it can be accessed.
• People lacking experience in running successful small businesses are less likely able to present their plans and financial information credibly to a funding body.
• There may be communication difficulties where business owners and funding bodies come from different ethnic backgrounds

According to renewal.net Overview[9], people on benefits may need an “income bridge” to see them through their early stages of running a business, when they incur start-up costs, lose entitlement t o benefit and cannot be sure of the income they will generate. According to renewal.net Overview[10], evidence from the Bank of England suggest that many Ethnic minority business owners perceive bank services as not geared towards their needs and as such are treated harshly when they try to source funds from these services. One third of Asians and two fifth of African Caribbean loan applicants reported having problems obtaining bank loans[11]. Reports from the bank also suggest that some of the Asian communities that have received family support in the past as a result of strong family networks now face difficulties raising start-up finance as a result of weakening family structures[12]. This paper is aimed at studying the financing of ethnic minority businesses in the United Kingdom with particular focus on the Asian perspective. The rest of the paper is organised as follows: section 2 describes the methodology used in achieving the paper’s objective; section 3 focuses on the theoretical framework with particular emphasis on the financing sources that theory prescribes for start-up companies; section elaborates on the presentation of data and analysis with particular emphasis on how the Asian minority businesses raise finance as opposed to the White ethnic group and other minority groups such as the African Caribbean (ACB) group. This section also provides an analysis of why Asian Minority businesses engage in business, the type of businesses and the profitability and growth prospects of the business; section 5 presents some conclusions based on the findings from the analysis in section 4. It also provides recommendations and identifies areas for further research.

2. Data Collection and Research Methods.

The method that will be adopted in the study will be a qualitative and quantitative method. Considering the time frame, it will be difficult to gather primary data for analysis. The research will therefore be highly based on the analysis of secondary data concerning ethnic minority businesses in the UK focusing particular attention on information and data concerning Asian minorities such as Indians, Pakistanis, Bangladeshis and Chinese. This will be done by gathering and analysing data from secondary sources and drawing conclusions based on the analysis. The main data sources that will be utilised in the study will include peer reviewed journal articles in the subject area, articles and numerical data from the bank of England, the UK Department of Statistics and the Home Office. The data will be analysed by comparing proportions, raw numbers, communities and other important variables. The limitation with the method adopted here is that it is based only on secondary data and information that has been gathered by other researchers. It is believed that the results could have been more robust if primary data was gathered and analysed at fresh. However, considering the fact that most of the studies have been carried out by renowned researchers in the field and also taking into consideration the fact that the studies have been published in peer reviewed articles, the results can considered general and thus a motivation for why this study is focusing on the data gathered by these previous studies.

3. Theoretical Framework

3.1 Sources of Start-up Finance

Small businesses are often very immature to raise finance in the equity or other sophisticated markets. Unlike the more sophisticated businesses that can issue common stocks and bonds in the open market, small businesses such as partnerships and sole proprietorships and small and medium size enterprises are relegated to other sources of finance. The main sources of finance to start-up companies can be classified into formal and informal sources. Formal sources include finances from banks, venture capitalists, credit unions, business angels and so on. Informal sources include personal savings, family funds and funds from friends.

3.1.1 Venture Capital Finance

Black[13] defines venture as capital whose owners are willing to invest in new or small businesses, where the risk of losing it is high. Venture capital is required when entrepreneurs with limited funds have the ability to start a new venture[14]. It is also referred to as risk capital because it is usually invested in projects with substantial elements of risk[15]. Considering the amount of risk inherent in venture capital investments, the expected return on the investment is usually very high[16].

Venture capital firms are typically made up of professional private equity managers representing large institutional investors such as mutual funds, and pension funds[17]. The limited partnership is the dominant form of intermediation in the venture capital market with the institutional investors acting as limited partners and the professional mangers acting as general partners[18]. General partners include firms that have a high esteem in funding and managing equity investments in closely held private firms. The private equity market is important for both start-up and established firms[19]. There are four main types of venture capital providers which include old-line wealthy families such as the Rockefeller family have traditionally provided start-up capital to promising businesses and have been actively involved in venture capital financing for a better part of the 21st century[20]. The second type of venture capital firms include a number of private partnerships and corporations that have been formed to provide investment capital to budding entrepreneurs[21]. The main people behind this form of venture capital include institutional investors such as insurance companies and pension funds who provide the necessary finance to the partnerships[22]. Examples of these partnerships include the American Research and Development (ARD), formed in 1946[23]. The most recent venture capital partnership is the Arthur Rock & Co. of San Francisco which has achieved near mythic stature in the venture capital industry following its investment in Apple Computer and other high-tech firms[24]. According to estimates, the total number of venture capital firms across the globe stand at about 2000[25].

In those days it was believed that the venture capital companies were the easiest sources of finance. However, even if that has been the case in the past, it is not the case today since obtaining finance through a venture capital firm demands a lot on the part of the borrower today. Venture capital firms today employ a lot of screening tools and procedures to prevent inappropriate funding. For example, venture capitalists have at least one employee whose full time job is only to read proposals for funding[26]. There are six main stages of venture capital financing as identified in Ross et al (1999: p. 518):

1. Seed-money Stage: at this stage a small amount of financing is needed to prove a concept or develop a product. Marketing is not included at this stage.
2. Start-up. This refers to the financing for firms that started within the past year. The funds at this stage are used for marketing and product development expenses.
3. First-Round Financing: at this stage additional finance is necessary to begin production and sales after a firm has exhausted its start-up capital.
4. Second-Round Financing: these and finances geared towards working capital for a firm that is already making sales but not yet breaking even.
5. Third-Round Financing: provided for firms that that are at least breaking even and contemplating expansion otherwise referred to as mezzanine financing.
6. Fourth-Round Financing: financing provided for firms that are likely to go into the equity market within half a year. This financing is also referred to as bridge financing.

Until the early 1980s when the Conservative Administration implemented new policy measures, little was known about venture capital in the United Kingdom[27]. The Companies act of 1981 created the business start-up scheme, which was later, renamed the Business expansion scheme. The scheme encouraged private individuals to invest in organisations, which were in turn, investing in unquoted companies[28]. The Companies Act of 1981 also resulted in the creation of the Unlisted Securities Market, which gave future exit mechanisms to venture capital organisations and individuals prepared to invest in currently illiquid investments. The main objectives of the government in enacting the 1981 Companies Act was to ensure the flow of funds to small firms, and high technology firms in particular, in recognition of their potential contribution to the regeneration of the economy following the 1974-1975 recession[29].

3.1.2 Business Angels

Moles and Terry[30] define business angels as individuals prepared to provide for high-risk, start-up business ventures and asserts that the term angel is also applied to backers of stage shows in the theatre business. It derives from the intention to do good rather than make a quick return on the money. Business angels are usually ex-entrepreneurs or business managers with a high quest to invest time and money in local start-up companies, typically in high technology sectors[31]. Their investments are usually small and take the form of minority shareholding for a period of anything up to ten years[32]. These angels are usually motivated by the entrepreneurial atmosphere and seek to be actively involved in their funded companies[33].

According to Wilson[34] quoting Mason et al (1991), the role of business angels in the UK is very significant and it is playing a major and important role in the financing of small business in the country. The business angels in the UK make investments typically under A£50,000 and a significant portion of these investments are in new and recently established ventures. These angels are therefore playing a significant role in bridging the gap between equity finance and start-up finance[35]. In addition entrepreneurs are more likely to raise start-up finance from the business angels than from venture capital firms who have a higher rejection rate than the business angels[36]. Business angels also target lower rates of return than venture capitalists, as they are always ready to see the company grow before they can start expecting returns on their investments[37].

3.1.3 Bank Financing

Banks play a major role in the financing of start-up businesses. Bank finance can be in the form of overdrafts for existing customers as well as bank loans and other forms of borrowing. Banks usually provide start-up finance to businesses in the form of loans, which carry a fixed rate of interest payable on an annual basis. There is usually also a fixed term within which the principal and any accrued interest must be paid back to the bank. While some bank loans may require that the borrower have sufficient liquid assets that can be put up as collateral, others can be granted without such a requirement. It all depends on how the bank evaluates the risk of the venture in which the borrower intends to invest the loan. In the United Kingdom, High street banks have recently introduced a number of innovations to attract new small business customers[38]. UK high street banks are now more interested in providing both business and financial advice to clients so as to ensure that the businesses they invest in have good plans and therefore limit the rejection rate of loan applications. High street banks have also been willing to invest in enterprises that target the development of certain communities. For example, the Community Loan Fund for North West, to which the Co-operative Bank contributed A£300,000, in 1999 National Westminster, launched a community bond scheme for nine English RDA regions (and Scotland and Wales) in order to invest locally in previously un-bankable projects[39].

Banks have also developed services targeted at a particular clientele groups. For example, the HSBC South Asian Banking Scheme. Banks have also been considering opportunities and diversity training very seriously resulting in the improvements in service for clients from the Business Minority ethnic (BME) groups (BME)[40]. An important role is also played by overseas or Ethnic Banks in export finance, through the provision of trade services and project finance. There is also the availability of the Small Firms Loan Guarantee Scheme, which is designed to improve access to bank finance for businesses experiencing financial hardship as a result of lack of collateral security of trading record, or a combination of both[41]. However, it is still very difficult for very small firms and high risk ventures to tap from the latter facility given their high degree of potential default risk[42].

3.1.3 Community Development Finance Initiatives

Community Development Finance Institutions (CDFIs) is a new term that constitutes a range of organisations that seek funding and at the same time meeting financial and regeneration objectives. There are four types of community development finance institutions, which include: loan funds; micro-credit funds; social banks; and credit unions.

a. Local Loan and Micro-credit Funds

These institutions, which are often run by enterprise agencies, exist to provide financial and moral support to applicants who have been unable to raise sufficient funds from other sources, as a result of the lack of a track record, collateral security or a combination of both[43]. The main type of support is in the form of advice, mentoring and/ or training to help build up the business and protect the venture from falling. Examples of this type of support include the Bolton Business Ventures Loan Fund, and the London Business Start-up Loan Fund. Many of these loan funds provide loans below the base rate offered by High street Banks and as such are referred to as “soft loans”. However, other borrowers outside the community involved are charged higher rates of interest to compensate for the extra risk taken and to ensure that they can rebalance their ability to provide funding in future[44]. These loan schemes are usually financed by Banks who provide some one on secondment to help with managing the fund, or have a bank representative in the panels deciding on how to distribute the loans[45].

Some of the funds are geared towards business expansion, such as the London Business Growth Fund, which provides unsecured loans of up to A£20,000 to businesses from socially and economically disadvantaged groups who have been refused finance from a mainstream lender[46]. This fund is managed by Business Link for London and oneLondon.

Other funds such as the 3b Investment Fund, run by 3b (Black Business Birmingham) who are now expanding their scheme to the Black Country with the support of the Phoenix Fund are targeted at particular customer groups[47].

Micro-Credit funds are funds that make very small loans (usually below A£5,000) to micro-entrepreneurs, typically sole traders or people in business with family or friends. The needs of these clients usually involve the buying of tools or trading stock[48].

There is another fund targeted towards financing unemployed people between the ages of 18 and 30 years. Applicants to this fund are expected to have good business ideas and prove that the have difficulties sourcing funds elsewhere. This fund which is referred to as the Princes Trust Business Programme provides bursaries, which can be offset against necessary costs of setting up a venture, test marketing grants of up to A£250 and start-up loans of up to A£5,000 to acquire fixed assets or working capital and/ or fund further training. This programme was co-funded by the Department of Work and Pensions and it was targeted to help 35,000 young people into employment over the period, 1999 to 2006. Another Fund is PRIME (Prince’s initiative for Mature Enterprise), which is a related UK wide organisation promoting self-employment amongst people over 50, and proving a loan fund of last resort[49].

b. Social Banks

These are profit maximising financial service providers designed to achieve social and environmental objectives[50]. The Triodos for example, provides financial services to enterprises, which are of cultural, social, or environmental value; the trade union and co-operative movement established Unity Trust to provide account services for the charitable sector. This trust is working in collaboration with the Co-operative Bank in promoting Mutual Loan Guarantee Societies. Mutual Guarantee Societies refer to formal associations of Small and Medium Size Enterprises (SMEs), which pool their savings in banks, to offer collective guarantees improving the value of loans to members and helping achieve better lending and deposit rates. These societies increase the amounts that targeted firms can borrow from banks between 20% and 50% and provide management support for loan applications and business planning[51].

c. Peer Lending

Otherwise referred to as Group Lending is a form of financing that operates on the principle that individual loans are dependent on the repayment record of the group as a whole: if one member defaults, no further lending is made to the group until the position has been adjusted[52]. An example of a peer lending group is the Full Circle Fund run by Women’s Employment Enterprise and Training Unit (WEETU). The members of this fund participate in lending decisions (peer group lending). Another example is the East End Microsoft Consortium (EEMC), which is a pilot project with the objective of widening access to finance for women, refugee groups, ethnic communities and anyone who feels financially excluded[53]. This consortium is made up of four local community-based enterprises, which have particular expertise working with these groups.

d. Credit Unions

Credit Unions refer to not-for-profit, co-operative savings and borrowing institutions. Their members save through shares, which are then, re-lent to members, sometimes at lower interest rates than those charged by the High Street Banks[54]. The United Kingdom constitutes more than 600 credit unions, which are divided into three main types: employee credit unions, community credit unions (defined by location), and association credit unions (defined by interest, e.g., a church group)[55]. Many credit Unions treat disadvantage communities as their thematic areas, while a few specifically target businesses, for example, North London Chamber and Enterprise Credit Union, and the Federation of Small Businesses Credit Union[56]. Most credit unions regard business financing as riskier ventures than personal lending and as such the small scale of the UK credit unions make the risk unacceptable[57]. Credit unions are now regulated by the Financial Services Authority (FSA) and provision for compensation for depositors in the event of default has now been strengthened, thereby making credit unions more willing to lend for business purposes[58].

e. Partnering Schemes

Partnering schemes provide members with the ability to raise larger sums of capital that would not have been raised in the absence of the scheme. An example of a partnering scheme in the UK is the Birmingham Partner Fund, a co-operative created to raise capital from the African Caribbean Community in Birmingham with a view to investing the proceeds in commercially viable businesses in that community[59]. Members are committed to regular monthly savings over a fixed period of time and the proceeds can be used to provide additional financing.

Other funding alternatives include asset-based finance e.g. leasing and hire purchase, factoring and invoice discounting and licensed moneylenders as well as government grants.

a. Leasing and Hire Purchase

A lease is a contractual agreement between a lessee and a lessor, which establishes that the lessee has the right to use an asset and in return must make periodic payments to the lessor, the owner of the asset. The lessor can either be the manufacturer of the asset or an independent leasing company. If the lessor is an independent leasing company, it must buy the asset from the manufacturer. Then the lessor delivers the asset to the lessee, and the goes into effect.[60]

As far as the lessee is concerned, it is the use of the asset that is most important, not who owns the asset. The use of an asset can be obtained by a lease contract. Because the user can also buy the asset, leasing and buying involve alternative financing arrangements for the use of an asset. There are two main types of leases including: operating and finance leases. In the yester years, an operating lease was regarded as a lease where the lessee received an operator along with the leased asset. Though the operating lease defies an exact definition today, this form of leasing has several important characteristics[61]:

-Operating leases are usually not fully amortised. This implies that the payments required under the lease contract are not enough to recover the full cost of the asset for the lessor. This occurs because the term or life of the operating lease is usually less that the useful life of the asset[62]. Thus, the lessor must expect to recover the cost of the asset by renewing the lease or by selling the asset for its salvage value.

-Operating leases usually require the lessor to maintain and insure the leased assets.

-Perhaps the most interesting feature of an operating lease is the cancellation option. This option gives the lessee the right to cancel the lease contract before the maturity date. If the option to cancel is exercised, the lessee must return the asset to the lessor. The value of a cancellation clause depends on whether future technological and/or economic conditions are likely to make the value of the asset to the lessee less that the value of the future payments under the lease[63].

Financial leases are the exact opposite of operating leases, as is seen from their important characteristics[64]:

- Finance leases do not provide for maintenance or service by the lessor.

- Financial leases are fully amortised by the lessee

- The lessee usually has the right to renew the lease on expiration

- Generally, financial leases cannot be cancelled. In other words, the lessee must make all payments or face the risk of bankruptcy.

Because of the above characteristics, particularly (2), this lease provides an alternative method of financing to purchase. Hence, its name is a sensible one. Two special types of financial leases are the sale and lease back arrangement and the leveraged lease.

i). Sale and lease-back

A sale and lease-back occurs when a company sells an asset it owns to another firm and immediately leases it back. In a sale and lease-back, two things happen[65]:

-The lessee receives cash from the sale of the asset

-The lessee makes periodic payments, thereby retaining use of the asset.

An example of a sale and lease-back occurred when the city of Oakland, California, used the proceeds of a sale of its city hall and 23 other buildings to help meet the liabilities of the $150 million Police and Retirement System. As part of the same transaction, Oakland leased back the buildings to obtain their continued use[66].

ii). Leveraged Lease

-A leveraged lease is a three-sided arrangement among the lessee, the lessor and the lenders[67].

As in the other leases, the lessee uses the asset and makes periodic lease payments.

- as in the other leases, the lessor purchases the asset, delivers it to the lessee, and collects lease payments. However, the lessor puts up no more than 40% to 50% of the purchase price.

-The lenders supply the remaining financing and receive interest payments from the lessor.

The lenders in a leveraged lease typically use a non-recourse loan. This implies that the lessor is not obligated to the lenders in case of default. However, the lender is protected in two ways:

- The lender has a first lien on the asset

- In the even of loan default, the lease payments are made directly to the lender.

The lessor puts up only part of the funds but gets the lease payments and all the tax benefits of ownership. These lease payments are used to pay the debt service of the non-recourse loan. The lessee benefits because, in a competitive market, the lease payment is lowered when the lessor saves taxes[68]

A hire purchase (HP) is a method of buying goods in which the purchaser takes possession of them as soon as an initial instalment of the price (a deposit) has been paid; subsequent instalments are paid either on a monthly or quarterly basis and ownership is obtained when all the agreed number of subsequent instalments have been completed[69]. A hire-purchase agreement differs from a credit-sale agreement and sale by instalments (or a deferred payment agreement) because in that in the latter transactions, ownership passes when the contract is signed[70]. It also differs from a contract of hire, because in this case ownership never passes. Hire-purchase agreements in the UK were formerly controlled by government regulations stipulating the minimum deposit and the length of the repayment period[71]. These controls were removed in 1982. Hire-purchase agreements were also formerly controlled by the Hire Purchase Act 1965, but most are now regulated by the Consumer Credit Act 1974[72]. In this Act a hire-purchase agreement is regarded as one in which goods are bailed in return for periodical payments by the bailee; ownership passes to the bailee if the terms of the agreement are complied with and the option to purchase is exercised[73].

A hire purchase agreement like a leveraged financial lease involves three parties to the contract including the hirer, the seller of the goods and a finance company. The finance company purchases the asset from the seller and enters into the hire purchase contract with the hirer[74].

b. Government Grants

A government grant is an amount paid to an organization to assist it to pursue activities considered socially or economically desirable[75]. An example of a government grant in the UK is the South Tyneside Council which provides Start-up Grants towards the capital expenditures of establishing a new business (up to 50% to a maximum of A£5,000) and Business Expansion Grants towards planned expansion of an existing business engaged in manufacture or supply of services to the industry (up to 30%, to a maximum of A£5,000)[76]. The trend in government grants has been moving towards loans rather than grant schemes although grant schemes with very specific purposes continue to feature in the programmes of many public agencies, e.g., the DTI’s SMART scheme makes grants to help individuals and small businesses to make better use of technology and to develop technologically innovative products and processes[77].

c. Personal Savings

Personal savings reflect the personal finances of an individual earned through employment or other sources such as inheritance and the sale of personal properties. These funds play an important role for start-up finance in that they can provide the initial force behind the investment. Most funding bodies and banks would prefer to form a company that has began operating already rather that begin risking their finances at the very beginning. Personal savings are closely related to family funds in that they are both informal sources of start-up capital. Family funds can come in the form of loans from close family members such as parents, grandparents, children, brothers, sisters as well as uncles and aunts. These funds also play an important role in providing the initial force behind the investment project while waiting for financing from formal sources such as Banks and government agencies.

4. DATA PRESENTATION AND ANALYSIS

4.1 Self-Employment Rates in the UK

Table 1.

Self employment rates for selected ethnic groups in great Britain, 1991.

	White	Black Caribbean	Indian	Pakistani	Bangladeshi	Chinese	All
Total Number of self employed by ethnic group	2,922,917	13,392	97,340	22,642	5060	17,869	3,078,436
As % of economically active members of ethnic group	7.0	3.4	11.4	8.3	5.9	14.9	7.0

Source: Adapted from Dhaliwal[78] quoting Barret et al (1996: p. 784)

The table above shows the number of people who were self-employed in the UK as at 1991. The figures show that most of the self-employed in the UK as at that time were the ethnic minority groups with the Indians demonstrating the Asian ethnic minority groups demonstrating the highest percentages of self-employed as compared to their total number. Chinese demonstrated a total number of 17,869 people. Of this total, 14.9% were self employed. They were followed by the Indians with 11.4% self-employees out of a total number of 97,340. Next came the Pakistani with a self-employment percentage of 8.3% out of a total number of 22,642. The Bangladeshi was the only Asian ethnic group that demonstrated a self-employment percentage below that of the whites. That is, 5.9% as opposed to 7.0% for the whites. As compared to the Black Caribbean ethnic group, one can see that the Asian minority demonstrates a far higher percentage of self employment than any other ethnic minority or white group in the UK.

4.2 Why Asian Ethnic Minorities Engage in Small Businesses in the United Kingdom

Most ethnic minorities tend to engage in small businesses or self-employed activities because of the difficulties faced in securing a job. Some of them simply want to be independent and others do business just for the doing of it. Some of them enjoy being referred to as business men. In addition, it is usually more difficult to meet work permit requirements as an immigrant in the UK and as such the most lucrative source of income for the time being is business. We can therefore conclude that some of the ethnic minorities enter into business during waiting times for work permits and other home office requirements. Another important reason that one can advocate for Asians entering into business is language barriers. Irrespective of their qualifications some of them might be unable to express themselves in good English and as such may find it difficult securing a job.

4.3 Types of Businesses they engage in

Ethnic minority businesses in Europe including the Asian ethnic minority community in the earlier years centred their businesses around saturated and unprofitable niches[79]. However, in recent times, ethnic minority businesses have started engaging in emerging business sectors such as mobile phones, IT consultancy and computer manufacturing[80]. Others are engaged in less technology-driven areas such as nursing, teaching and training agencies, and care homes. They are also recently increasing their presence in media, insurance and financial services[81].

From table 4 above, one can see that most of the ethnic minorities are involved in retail and mobile phones with a few of them in wholesale, fashion, laundry and IT. This indicates that that are relegated to low-rewarding activities as earlier mentioned in the introduction[82]. In addition some are engaged in more sophisticated industries such as hotels, shipping and steel manufacturing[83].

4.4 Sources of Start-Up Capital and Advice for Ethnic Minority Firms

Table 2: Source of start-up capital: contribution of each source

	Degree of reliance
	None	Less than or equal to 50%	Greater than 50%	Mean share of each source
Personal savings	47 (26.7)	55(31.3)	74(42.0)	51.01
Family capital	115(65.3)	26(14.8)	35(19.9)	22.65
Bank loans	110(62.5)	38(21.6)	28(15.9)	20.86

Figures in brackets represent the percentage share of the sample

Source: Adapted from Basu[84]

Table 4: Case study firms: Financial sources

Code	Ethnicity	Sector	Source of finance
TRADITIONAL
S1	Indian	Wholesale	Personal savings
S2	Pakistani	Wholesale	Family and friends
S4	Indian	Laundry	Personal savings
S5	Indian	Restaurant	Bank
B1	Pakistani	Retail	Bank
B2	Indian	Retail	Personal savings
B15	Bangladeshi	Retail	Family and friends
B16	Bangladeshi	Clothing	Personal savings
B25	White	Retail	Personal savings
L6	Chinese	Travel	Personal savings
L7	Chinese	Estate agent	Personal savings
L8	Chinese	Restaurant	Family and friends
EMERGENT
S6	Chinese	Fashion	Bank
S8	Pakistani	IT	Bank
S9	Pakistani	IT	Bank
S10	Pakistani	Mobile phones	Personal savings
B4	Pakistani	Health	Personal savings
B5	Pakistani	Mobile phones	Family and friends
B6	Bangladesh	Mobile phones	Bank
B17	Pakistani	Finance	Bank
B19	Indian	IT	Family and friends
L10	White	IT	Bank
B24	White	Consultancy	Bank

Source: Adapted from Ram et al[85]

Table 5: External Finance from Formal Sources at Start-up ( Finance from sources other than personal savings, family or friends)

	Firms Obtaining External Finance	Firms Obtaining Bank Finance	No. of Respondents (N)
	No.	%	No.	%
ACB	55	31	38	21	177
Pakistani	57	35	55	34	162
Indian	74	41	67	37	179
Bangladeshi	44	34	43	33	131
Chinese	84	51	81	49	164
All EMBs	314	39	284	35	813
White owned	93	39	82	34	240
All firms	407	39	366	35	1053

Source: Adapted from Smallbone et al[86]

Table 2 through to 7 shows the different ways in which the Asian ethnic minority groups raise finance. As we can see the main sources of their start-up funds are both from formal and informal sources of finance. Formal sources mainly include bank loans, and other sources such as grants and venture capital firms. Informal sources include personal savings, family and friends.

Most of the ethnic minorities raise finance through personal savings. According to the survey carried out by Ram et al[87] on the issue of how the ethnic minorities raise finance, 9 out of the 21 ethnic minority respondents reported that they raised initial or start-up capital from personal savings, 5 reported that their initial capital was raised from family and friends while the remaining 7 succeeded in raising start-up capital from banks. According to the study by Basu[88], and looking at the figures in table 2 above, it was found that only 47 respondents (26.7%) did not rely at all on personal savings as part of their start-up capital contribution, 55 (31.3%) reported that their degree of reliance on personal savings was at least 50% while 74 (42%) reported that their degree of reliance on personal savings was above 50%. As concerns the degree of reliance on family funds, 115 (65.3%) reported that they did not rely at all on family funds, 26 (14.8%) reported that they relied at least 50% on family funds while 35 (19.9%) responded that their degree of reliance on family funds was above 50%. For bank loans, 110 (62.5%) said they did not rely at all on bank loans, 38 (21.6%) reported they relied at least 50% on bank loans and 28 (15.9%) claimed that their degree of reliance on bank loans for start-up capital was above 50%. Overall the mean share of start-up capital from personal savings was 51.01%, that from family funds was 22.65% while the share from bank loans was 26.8%. In another study by Smallbone et al[89], we observe from the table 5 that 84 Chinese respondents constituting a percentage of 51% obtained start-up finance from External sources, 74 Indians constituting a percentage of 41% obtained external financing, 57 Pakistanis, constituting a percentage of 35% obtained external financing while 44 Bangladeshi constituting a percentage of 34% obtained external finance. The study by Smallbone et al[90] included white owned businesses as control groups as well as African Caribbean (ACB). As a basis for comparison, one can observe that as far as external financing is concerned, the ACB obtained the lowest percentage (31%) of external financing for start-up while the white owned group obtained 39% of external financing as start-up capital. In addition, the total percentage of EMBs as shown in table 5 that obtained external financing at start-up constituted only 39% of the total number of firms. Of this number the Asian minorities appeared to have obtained the greater share of the external financing. Among the Asian minorities, the Chinese scored the highest percentage followed by the Indians, then the Pakistanis and lastly by the Indians. As far as bank financing is concerned one can observe from table 5 that the Chinese among the ethnic minorities and among the Asian ethnic minorities again obtained the highest amount of bank finance as start-up capital. Even their white owned counterparts scored below them in terms of obtaining bank financing at start-up, that is, 49% for the Chinese businesses as opposed to 34% for the White-owned businesses The Indians came second with 37% also above their White-owned counterparts.

Table 6: The propensity of Firms to Access Start-up Finance from Family and Friends

	Yes	%	No	%	Don’t know	%	Respondents	%
ACB	70	40	101	57	6	3	177	100
Pakistani	90	52	63	37	19	11	172	100
Indian	83	46	84	46	15	8	182	100
Bangladeshi	74	54	47	35	15	11	136	100
Chinese	54	35	94	61	6	4	154	100
All EMBs	371	45	389	47	61	7	821	100
White-owned	63	25	162	65	25	10	250	100
All firms	434	41	551	51	86	8	1071	100

Source: Adapted from Smallbone et al[91]

Table 6 above shows the propensity of firms to access start-up finance from family and friends as observed by Smallbone et al[92]. One can observe from the table that among the Asian minorities that the Bangladeshi group is most likely to access family funds at start-up with a total number of 74 (54%) respondents answering “yes” to the survey. The lowest percentage was observed for the Chinese among the Asian ethnic minority group with a total number of 54 (35%) respondents answering “yes” to the survey. The Pakistani and Indian groups follow the Bangladeshi group with 90 (52%) and 83 (46%) respondents answering “yes” to the survey respectively. The white control group shows the lowest propensity to access family funds at start-up. For comparison purposes, the African Caribbean group showed a somewhat high percentage above the Chinese group and the White-owned control group but below the rest of the Asian minority group members, that is Bangladesh,

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