Small and medium-sized enterprises (SMEs) grow progressively faster as their ability to borrow increases, according to finance supermarket Funding Options.
The research shows that SMEs with access to higher levels of borrowing grew their turnover on average by 15.7% over the last five years, compared with 14% growth for those with no borrowing* (see graph below).
Funding Options says that slower growth as a result of inability to borrow sufficiently could have cost the UK economy as much as £2.9 billion of potential turnover in the last five years from SMEs.
It explains that the ‘high borrowing’ category included companies with a debt level above 50% of the value of the business’s assets. Companies in the ‘no borrowing’ category had borrowing of less than 10% of the value of the business’s assets (see table below).
Funding Options says the results show that access to funding is one of the most important factors influencing the growth of small businesses in the UK, and that a lack of available lending from high street banks has acted as a significant drag on SME growth since the credit crunch.
Since the financial crisis UK banks have been required to hold higher levels of capital as a safety buffer when lending money. Funding Options says that this means that banks have significantly less appetite to lend to businesses, especially SMEs.
Whilst a number of ‘challenger banks’ have been set up and are lending to small businesses the size of their loan books is not yet sufficient to meet the needs of the SME economy.
Recent research by Funding Options also shows that the overdraft facilities available to SMEs have been withdrawn at the rate of £5 million per day since 2011. This has the effect of reducing SMEs’ working capital, acting as a substantial roadblock to growth.
Funding Options highlights that one positive result of the reduction of financial support to SMEs from banks has been the growth of alternative forms of finance. Many forms of financing on offer suit SMEs better than traditional bank loans.
Financing solutions for SMEs outside of traditional lending include major alternatives like leasing and invoice finance, both of which provide tens of billions of pounds of funding to small businesses each year, as well as smaller-scale options like peer-to-peer lending and crowdfunding.
Conrad Ford, CEO of Funding Options, said: “This research shows in stark terms just how much growth small businesses have missed out on over the past five years, simply because they have not been able to borrow on the scale they need.”
“Having weathered the worst of the recession, many smaller businesses are now seeking to expand and need access to finance to achieve that, but their growth is being hampered by a lack of appetite for lending among some high street banks.”
“That’s why every small business in the country needs to know where it can go next if its bank says no.”
“There is a whole universe of alternative finance options for SMEs, which can be tailored to fit their size, their sector, and where they are in their life cycle. For some, that will mean invoice finance to provide working capital, and for others an asset finance deal to get the cutting-edge equipment they need.”