By Daniel Hunter
Awareness of different types of business finance is very low among small to medium sized enterprises (SMEs), with most continuing to rely on traditional bank overdrafts or personal sources of cash for additional funding, according to new research by Experian, the global information services company.
A poll by Experian of nearly 300 SMEs, conducted to understand how and why they have sought additional finance, has found that alternative sources of finance are yet to have made a significant impact. Of the various forms of business funding options, crowd-funding was the least well-known among respondents, with 69 per cent never having heard of it. Meanwhile, angel investment, business cash advances and government grants also scored poorly in terms of awareness.
When questioned about the first thing they do when thinking about additional financing, 42 per cent of respondents said that they would approach their personal bank. This was followed by 18 per cent who said they would speak to their accountant. Few of the respondents stated that they would shop around: just one in ten said they would try all the major banks first, seven per cent said they would search the internet for the best deals and just six per cent said they would speak to a broker.
The findings also reveal that 60 per cent of respondents had sought some form of extra funding in the last 12 months and the need to alleviate short-term cash flow problems was by far the biggest reason for applying for extra cash (58 per cent). This outstripped activities for growth, such as expanding their product portfolio (20 per cent) or hiring more staff (12 per cent). When asked to name the primary source of additional funding currently used, the top answer (20 per cent of SMEs questioned), was delaying payments to their suppliers, further highlighting the desire to ease their cash flow. This was equal with the 20 per cent who said they rely on cash from family or friends.
Experian also found that only one in four (27 per cent) SMEs definitely planned to apply for some form of extra funding in the coming year.
“When looking for finance, the first port of call for SMEs is their bank," Max Firth, UK Managing Director for Experian’s Business Information Services division, said.
"However a commercial loan is unlikely to be appropriate for their specific needs, especially if the need is short term, such as alleviating cash flow issues. For many SMEs, it may make more sense to consider invoice finance options to alleviate the stress of collecting payments, especially where large new deals are won and they are already dealing with increased outgoings to ensure delivery of an order.
“It’s clear that SMEs are struggling to get paid themselves and this suggests that getting new customers on board is outweighing the need to assess the credit ratings and payment performance of prospective customers before doing business with them. This is a risky way to operate. It is vital that SMEs are completely aware of how quickly clients pay their bills to other suppliers and any likely impact on their own business.
“Furthermore by delaying their own payment to other firms, they are storing up further difficulties for themselves in the future. A poor payment history could eventually affect their credit rating, their attractiveness to customers and their ability to negotiate good deals with suppliers.”
Join us on