By Claire West
Small and medium-sized businesses are using a wide variety of financing options to access finance, including credit from trading partners and late payment.
But they are also becoming increasingly important as creditors in their own right, according to a new survey by the CBI and the Association of Chartered Certified Accountants (ACCA) out today.
Small business finance and the recovery, a survey of 380 UK small and medium-sized firms (SMEs) and nearly 100 accountancy practices, found that bank overdrafts are the most popular form of finance, with 33% of respondents applying for them with a success rate of 73%.
However, credit from suppliers, within agreed terms, is becoming more widely used, with 29% of SMEs seeking additional credit in the past year, and almost all of them (91%) succeeding. This did not include late payment, which is also a widely used source of finance. 17% of respondents used late payment in the past year, with 89% succeeding.
Other funding options used by SMEs include turning to owners, directors, families and friends for finance. This was used by 21% of firms with a 94% success rate.
The survey also found that larger SMEs are more likely to succeed in obtaining bank loans than smaller ones, often for sound reasons. However, even after taking into account the very strong effect of applicants' cash positions, micro-enterprises (with fewer than 10 employees) struggled to get approval, most likely on the grounds of lack of security or collateral.
Russel Griggs, Chairman of the CBI’s SME Council, said: “Small and medium-sized businesses are the lifeblood of the economy, and will play a crucial role in creating jobs and prosperity during the recovery.
“This survey shows that SMEs are turning to a wider pool of funding options to get the credit they need to grow their businesses. Trade credit is a hugely important source of funding and many firms are choosing to extend terms with suppliers and use late payment rather than seek external finance.
“Although banks remain an important source of finance, there remains a lingering perception that applications will be refused. However, this survey shows that three-quarters of all applications for bank loans and overdrafts do succeed. Providing accurate financial information and using proper credit controls will help open up more doors for SME funding.”
Manos Schizas, Senior Policy Adviser with ACCA, added: “While we still don’t have smoking-gun evidence of discouraged demand for finance, this is what our data seem to suggest.
“Businesses are using a wide range of substitutes to bank loans, some appropriate and some not, and trade credit is becoming even more important that it already was.
“More needs to be done by lenders, the government and the accountancy profession to ensure that businesses are aware of all financing options and their merits.”
Nearly half of the SMEs surveyed (45%) reported restrictions in the supply of credit during the past year, with suppliers more active than banks and other commercial lenders in withdrawing credit from customers. 54% reported that they had tightened their own credit policies, while a further 13% of SMEs indicated that they would have withdrawn credit from customers had it been commercially viable.
Although SMEs are becoming more aware of credit risk, many firms are relying on incomplete and dated information - twice as old as they would tolerate when using information for their own management purposes. The use of credit reference information was particularly low, with 57% of micro-enterprises saying it was 'not important' to their credit decisions. That is despite evidence that users of such information were more confident about the strength of their credit policies.
Looking at government support for SMEs, tax deferral emerged as the most successful type of government support, used by 11% of respondents. The survey also found evidence that businesses were interested in the range of grants available, but smaller SMEs were much less likely to succeed when applying for these.
The report makes a number of recommendations to ensure that SMEs can access the finance they need:
Finance staff and financial advisers need to be willing and able to educate SME owners in credit management and challenge their thinking where appropriate.
Lenders and business representative bodies need to develop a constructive response to discouraged demand for finance and highlight the high success rates to encourage good applicants.
Finance professionals, credit providers and business support organisations need to be able to provide advice and support to SMEs who need to understand the credit markets which are gaining prominence as an alternative to bank lending in the recovery.
· As the Government continues to streamline the business support structure it needs to be certain that it is reaching businesses most in need, rather than just the ones more used to tendering.