Understanding access to external finance of rural enterprises and impact on growth


Rural enterprises may suffer from poorer access to external finance and fewer options, due to potentially long distances to suppliers and the market. Their performance may be impeded due to limited access to external finance.

Employing the Longitudinal Small Business Survey 2015-2019 for firms in England located outside of London, the first part of this project considers whether firms’ use of external finance varies across, and within, urban and rural locations, and explores its impacts on business growth. The second considers demand for external finance of rural and urban businesses, discouraged borrowing and rejection decisions made by financial providers once firms had applied.

Key findings

Rural firms are more dependent on debt finance than urban firms, particularly overdrafts and credit cards. Equity finance is significantly less used by both rural and urban firms than other financing options. Rural firms are more likely to seek equity finance from family and friends.

Rural firms tend more often to seek external finance for equipment and vehicles than urban firms, and vice versa for staff training and development.

There are some regional variations, which fluctuate across years. For instance, in the North East and South West, rural businesses are more likely to use bank finance than urban businesses.

After controlling for firms’ and owners’ profiles, the amount of obtained external finance has a stronger impact on growth of rural firms than growth of urban firms.

Conclusions and recommendations

  • The higher tendency of rural firms to obtain equity finance from family members or friends, compared to urban businesses, may imply that the use of informal finance and networks is relatively more common in rural businesses.
  • The differences in the purposes of external finance may lead to varying impacts on business growth.
  • Similar levels of external finance appear to have a stronger impact on the growth of rural businesses, compared to urban businesses, after controlling the businesses’ characteristics. As such, the impacts of external finance on small business growth appear to be particularly pronounced in rural areas.
  • Given their greater dependence on banks as a source of external finance, and the stronger impact of external finance on growth for rural firms, it may follow that bank branch closures may have a disproportionate impact on the financial position and growth of rural businesses.
  • There are differences between rural and urban businesses in their growth determinants. For example, innovation has a stronger impact on the growth of rural businesses, compared to urban ones. Further studies are warranted to consider these trends in greater depth, particularly relating to innovation, growth ambition, women-led business, and exporting. It is also important to understand the impacts of finance on other critical aspects of businesses, for example innovation or exporting, and how the impacts relate to size, age, sector, or location.