The Bank Financing of Small Unlisted Firms in the UK: An Analysis of Recent Conflicts

This paper examines the characteristics of UK small firm bank finance and the causes of the frequently strained relationship between small firms and banks in the UK. Debt, credit rationing, and call option problems under the UK system are examined. The bank’s solutions including the potentially harmful “secured overdraft system” are then considered. It is argued that the majority of solutions tried by the banking system led to a heightened conflict of interest between small firms and banks during the recent recession due to the banks’ loan restructuring to avoid unnecessary risk.