Finance · 21 February 2017

Cautious small business owners opt for slower growth over borrowing

Some eight in ten owners said that future growth would be dependent on personal savings

Over seven in ten small business owners have admitted they would accept slower growth over using external finance to grow their company, according to a new study that reveals scepticism over borrowing.

The Small Business Finance Markets report, compiled by government lender British Business Bank, found that while the credit conditions for entrepreneurs continued to improve, with eight consecutive quarters of growth in bank lending to small firms, economic uncertainty had knocked the appetite for borrowing among owners. 

Confirming the cautious outlook of small businesses, some 80 per cent of owners agreed that plans for future growth were dependent on what they could fund personally.

This was reflected through falling loan application rates. The study found that demand for business loans among owners steadily declined in the last four years. In 2016, just six per cent of small business owners applied for a new loan or overdraft extension, compared to 11 per cent in 2012.

The idea of being “put-off” borrowing by fear of rejection from a bank was found to be the most common barrier to applications, while one in five owners were deterred by perceived “processing” issues.

The uncertainty around borrowing was representative of a wider knock to business confidence for owners. Over half of small firms expected growth in 2015, to just over a third in the bank’s latest report.

Inflationary pressures on the pound following the EU referendum in June 2016 was one key factor attributed to poor growth prospects.

However, the report did highlight the diversification of the UK’s finance market, with lending through peer-to-peer platforms rising by 30 per cent since 2016 and asset finance reaching £16.8bn in the last 12 months. 

Commenting on the study, Keith Morgan, CEO of British Business Bank, applauded the broader finance options becoming available to owners, but warned of the remaining challenges to small business growth.

“While this continued improvement is welcome, our report shows that [owners of] smaller businesses still face challenges on their growth journey. Despite the improvement in finance markets, many seem to be holding back on their ambition, not simply because they can’t access finance but because they’re cautious about seeking it in the first place,” he said in a statement.

Small business minister Margot James said that the growth of alternative lending was “encouraging”, but recognised the need to provide greater information to owners regarding the credit options available.

James added: “Last year [the government] gave an extra £400 million to the British Business Bank to help unlock later stage venture capital investment. As a country, we already have an excellent record in creating new businesses. The government is now focused on tackling the barriers faced by those looking to scale up, particularly outside London and the South East.” 

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Praseeda Nair is the editorial director of Business Advice, and its sister publication for growing businesses, Real Business. She's an impassioned advocate for women in leadership, and likes to profile business owners, advisors and experts in the field of entrepreneurship and management.