Towards the end of 2015, the Bank of England Governor, Mark Carney, remarked that banks have almost completed the job of building up their defences, but could still need to hold up to £10 billion more capital.
Recently the Committee on Banking Supervision said the amount of capital banks had to maintain for their trading books would be 40% higher than what they hold now. Although the job of protecting banks and their customers may have progressed somewhat, the reality is that banks still have massive capital buffers to put in place. This will continue to act as a drag on their ability to lend to small businesses for some time to come.
SMEs appear to be responding to this shifting climate by relying more heavily on unsecured and unreliable forms of financing. Research we conducted earlier last year found that UK SMEs are dipping into personal savings. According to our SME Confidence Tracker, 14 per cent are using personal savings and loans from friends or family, while around one in four (23%) are using a bank overdraft to fund their business.
While borrowing money from friends and family might be an easier solution initially, in the long term it will act as an impediment to growth. As fast growing SMEs’ funding needs change and their funding requirements become more sophisticated, the tap of familial generosity will run dry.
In reality there is no need for SME owners to pursue these unreliable forms of financing. There is a substantial amount of working capital that remains untouched by the UK’s small businesses. Indeed, the latest Asset Based Finance Association (ABFA) figures indicate that British SMEs are owed £67.4 billion in unpaid money. This is valuable collateral which small businesses can put to work, investing it back into their businesses, hiring more skilled staff, buying new equipment and more.
Specifically, invoice financing is good way of gaining access to cash that you are already owed, instead of having to wait for weeks, if not months, for clients to pay their invoices. Additionally, trade and export finance offer specialist funding for businesses trading abroad.
Now is the time for the small business owner to heed this advice and start using their own assets to finance growth in 2016. There is no need to borrow money from others – whether a loan or funds from a family member – when you are sitting on hard-earned profits that you can release today, instead of tomorrow.
For more information, take a look at the Daily Telegraph website for examples of how we’ve helped our clients to unlock growth from within their businesses.