External finance and the growth of rural and urban SMEs in England

Small and Medium-sized Enterprises (SMEs) make a substantial contribution to regional development and economic prosperity. Access to external finance is an important determinant of business growth, and the growth potential of rural firms may be hindered by limited access to external finance. Using data from the UK Longitudinal Small Business Survey, the paper examines the impact of external finance on SME growth, paying attention to differences between rural and urban enterprises. Results from an extended ordered probit model incorporating year- and firm-effects, indicate that the impact of external finance on growth is stronger for rural businesses than their urban counterparts. This holds for both microbusinesses and SMEs. A lack of perceived direct competitors positively moderates the impact of external finance on business growth, with more rural businesses operating in competition voids. The results are robust after controlling for firms’ characteristics and endogeneity bias.