Finance · 15 March 2018

Entrepreneurs continue to invest own cash despite green light on bank loans

Only five per cent of business owners requested a new loan or overdraft in the last year

Small business owners are more likely to use their own cash than take out bank loans to drive growth, despite most applications for extra funds or overdrafts being given the green light.

According to the latest quarterly SME Finance Monitor from research consultancy BDRC, 47 per cent of small business owners were classified as “permanent non-borrowers” with little appetite for finance. That is up from 34 per cent in 2012.

Only five per cent of small company owners reported making a new or renewed loan or overdraft application in the last 12 months, unchanged on the 2016 figure but down from 11 per cent in 2012.

This is despite 80 per cent of all loan and overdraft applications made in the last 18 months being successful.

A third of small firms received trade credit and 25 per cent held more than £10,000 in credit balances. Just under a third have received an injection of personal funds from the owner or director.

“Four in ten SMEs are planning business activities that might benefit from funding, but they are as likely to think they would fund a business opportunity themselves as approach a bank for funding,” said Shiona Davies, director at BDRC.

Read more: Interest rates hike could cost small business owners £355m in just one year

Indeed, the survey found that 45 per cent of SMEs in 2017 were planning to grow with the proportion planning to apply for finance increasing from ten per cent in the first quarter to 14 per cent in the fourth quarter.

However, 70 per cent said they would rather grow more slowly than borrow to grow faster.

Use of equity finance was also low, with 62 per cent of business owners stating that it was a form of funding that they knew nothing about.

Larger SMEs were more aware but only six per cent were using or considering using it. One in five owners were aware of equity finance but thought it was not a suitable form of finance for them.

The research revealed that 82 per cent of SMEs were profitable, with 42 per cent reported having grown in 2017.

The top three barriers to running their business were “legislation and regulation”, political uncertainty and the current economic climate.

“There have been no dramatic market changes in SME sentiment since the referendum,” said Davies.

“Whilst there are some increased concerns about the economy and political uncertainty larger SMEs in particular are more likely to be planning to grow and to be using finance, as are those SMEs with a long-term objective to be a bigger business.”

Stephen Pegge, director of commercial finance at UK Finance, said: ““It is encouraging that increasing numbers of small firms are looking to use finance to grow their business in the year ahead.

“However, most SMEs are still self-funding, with the vast majority not seeking any new external finance in the past year. It appears that most small business owners are carefully considering their options before seeking external finance, with larger SMEs more likely to borrow to help expand their business.”

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