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Unreliable finance is the scourge of success

The legacy of 2008’s economic downturn for small and medium sized businesses was a tightening of lending criteria, which resulted in a marked fall in bank lending in the years following.

Recent analysis, however, suggests that the situation is becoming a little more favourable for SMEs. The Bank of England reported in May that banks extended an extra £600m of credit in the first quarter of the year to small businesses. Furthermore, the British Bankers’ Association, which covers 21 high street lenders, showed borrowing by non-financial businesses grew by £300m in April.

I get by with a little help from my friends

But while net lending has grown, it’s clear that more needs to be done to make the UK’s army of SMEs aware of the options available to them.

Our own analysis as part of the BFS SME Tracker* found that 14 per cent of SMEs are using personal savings and loans from friends or family, while around one in four (23%) are actively using a bank overdraft to fund their business.

Though 13 per cent said that unreliable cashflow was the biggest threat to their business, almost a quarter (24%) told us that they do not use external finance to grow their business.

While borrowing money from friends and family might be an easier solution initially, in the long term this could become an impediment as fast growing SMEs’ funding needs change and their requirements become more sophisticated.

A buoyant funding market

We are now out of the woods with a thriving lending market, but it’s not only funding through traditional channels that has increased.

According to the Asset Based Finance Association, businesses in the UK received £19.4 billion of funding through asset based finance in Q4 2014, an increase of £1.6 billion on the same period in 2013.

However, while this important means of funding is growing in popularity, there is still a substantial amount of working capital available that independent funders are willing to lend, but that SMEs are not yet accessing.

Our own research showed that SMEs are worried they will be denied funding, while others simply avoid applying for funding because they don’t want to go to a bank – and would sooner ask a friend or family member to lend them money for their business.

We must acknowledge that there is residual concern within the SME community when it comes to accessing external funding for their businesses. Simply planning to bring more so-called ‘challenger’ banks to the High Street will not tackle SMEs’ funding challenges. Rather, the new Government should prioritise making SMEs aware of all the funding options available to them, rather than becoming further indebted to friends and family.

*Bibby Financial Services conducted in-depth research amongst 1,002 UK SMEs with an average turnover of £1.2m in Q1 2015.

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