UK200Group comments on a study that suggests SMEs are shunning finance for ‘self-sufficiency’
Members of the UK200Group of independent accountancy and law firms have today commented on a new study that suggests SMEs are shunning finance for ‘self-sufficiency’.
The latest Continental SME Finance Monitor by market research consultancy, BDRC, shows that 43% of small and medium-sized enterprises (SMEs) in 2014 classed themselves as “permanent non-borrowers”, indicating that they had no interest in using external finance – a 10% increase on the figures from 2012 (33%).
The Monitor also revealed that the number of small businesses using external finance had fallen from 44% in 2012, to 37% in 2014.
However, despite this drop in finance, 78% of SMEs who took part in the study reported a profit last year, compared with just 69% in 2012.
Duncan Montgomery, tax partner at UK200Group member firm Whittingham Riddell LLP, said: “SMEs paying down debt and becoming self-sufficient for finance sounds great, but as ever a forecast that fits with the business plan is key to making sure that there are no pinch points or surprises coming. Funding for growth and larger capital expenditure can be an issue if relationships with the bank are not maintained.
“As ever in business, looking for the advancements that give you the edge over others is critical, and part of bringing that product development to market is finance. So, to the extent a non-borrower status can be maintained, without constricting development, brilliant. However, the balance between borrowing and keeping the business on the right path is a tricky one for many.”
Jonathan Russell, partner at UK200Group member firm ReesRussell, said: “There is nothing new in the move by SMEs away from external finance and this goes back to well before the financial crash, particularly for small businesses. With the main clearing banks de-skilling the people dealing with small businesses and insisting that almost all borrowings done by small limited companies was supported by, at best, personal guarantees, but more usually guarantees supported by personal assets, it was cheaper and easier for the proprietors to borrow money personally and then introduce that to their business.
“The situation is no different now, except the actual borrowing of money is harder. As a result, with the exception of borrowings for specific assets, the owners of small businesses are either using retained profits or personal money to finance their business.
“For the small lifestyle business this is not an issue, but for the entrepreneurial or expanding business, growth can sometimes be hampered by the reluctance to borrow, even if borrowing might be available.
David Whiscombe, director of Tax at UK200Group member firm BKL, said: “The conclusion I would draw is not that SMEs don’t need or want external finance; it’s that banks have, by and large and with some honourable exceptions, lost the trust of the SME community. It will take them a long time to recover it, if they ever do: and in the meantime the opportunity for trustworthy non-traditional lenders to fill the gap is there.”