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|a Technological innovations are seen as one of the best solutions to mitigate the environmental impacts of economic activity. Yet, the innovative success of firms, especially small- and medium-sized enterprises (SMEs), in the environmental sector is dependent on the presence of appropriate external financing to support their innovative activity. In an attempt to understand the circumstances surrounding the financing of 330 UK SMEs from the environmental sector between 2007 and 2010, we investigate the relationship between different types of innovation activity and sources of external finance. We observe a clear division of labour between the three external sources of finance, namely, banks, venture capital and government in terms of the types of innovations they finance. We also identify that finance gap affects environmental SMEs with early-stage and less applied research projects. We discuss the challenges for UK environmental SMEs to engage in innovative activity and call for an increased government action in order to support innovative SMEs with early-stage projects and to instil confidence in the private investors by signalling long-term commitment.
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