By Marcus Leach

With recent initiatives to improve access to credit, such as Project Merlin, reportedly falling short, small to medium sized enterprises (SMEs) are turning to high risk forms of finance.

These include credit cards and loans from friends and family to keep their business on track as the financial wellbeing of UK businesses declined during the six months to April 2011.

This was revealed in the latest SME Trends Index report from Hilton-Baird Financial Solutions.

The six-monthly survey showed that credit cards currently rank among the top two external sources of SME finance, with 42% of respondents admitting to using them. This is a slight decrease (of 2%) on November 2010 figures but still represents a worrying over-reliance on high cost funding.

Bank overdrafts remain the most popular external funding option for SMEs, with 44% of respondents using this method over the past six months, although this too is slightly down from 49% recorded in the previous survey.

Interestingly, loans from family and friends were also used widely, with 20% relying on the generosity of loved ones as a business lifeline, despite the economic growth recorded in the first quarter of 2011.

There was also alarming evidence that many SMEs were failing to fully explore other viable funding opportunities as only a quarter of respondents (25%) are currently using asset finance and even fewer are using invoice finance (21%). Given the proven benefits of such forms of funding, this is worrying and suggests that businesses could be stuck in a funding rut as the UK continues its recovery.

The overwhelming use of credit cards and family loans carry greater risks and leave businesses more susceptible to the pressures of the economic climate. This is acknowledged in the survey as, while 34% of total respondents stated that they expect January’s VAT increase to lead to further strain on their business’ cash flow, this figure was much higher amongst users of both credit cards and loans from friends and family (45%).

“Given the recorded improvements to the economic climate, businesses should seize the opportunity to evaluate their funding methods," managing director of Hilton-Baird Financial Solutions, Evette Orams, explained.

"Even though conditions remain tough, it is amazing how many SMEs are using forms of finance which carry with them huge risks to give them a quick fix cash injection.

"Whilst it is understandable that owners or managers will feel more comfortable turning to friends and family they trust or indeed the familiarity of a credit card, these forms of funding don’t account for the long-term impact, which is often overlooked when dealing with the day-to-day realities and pressures.

“Businesses of all sizes would be wise to pause for thought and consider the potential pitfalls of simply sticking with funding solutions they are familiar with, however strained their cash flow. Funding that is tailored to suit the individual business’ requirements, providing flexibility when it’s most needed, will be invaluable in the coming few years.

“Our Index has shown that invoice finance and asset finance users are feeling more confident and financially stronger. While the benefits are evident it should also be noted that, with a wide range of funding options available to UK businesses, an independent commercial finance broker can assist in identifying the right solutions for a variety of business needs.”

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