By Daniel Hunter

SMEs are shunning traditional banking products and favouring alternative lenders, according to the Forum of Private Business (FPB).

While the appetite to seek finance may be on the rise for UK micro and small businesses, the latest information from the BDRC Continental SME Finance Monitor, released today (Thursday, 27th November), highlights that many continue to shun traditional banking products and are looking towards alternative financial providers, their supply chain or dipping into their own personal funds to finance future growth.

Figures for the third quarter of 2014 show that 23% of small and micro business owners are looking to borrow in the next three months, the highest level seen since the survey began in 2011.

However, the report also highlights that small firms still perceive ongoing difficulties in securing funding, reporting a confidence gap of 10% in terms of those who were fairly or very confident that they would receive bank finance and the proportion that actually did (46% compared to 56%).

In addition, 68% of businesses surveyed reported their aspirations to pay down what is owed and to be debt free and only 39% are happy to use external finance to help the business grow.

The findings also reveal that small firms are increasingly more likely to look to other forms of funding rather than core banking products. The gap between core products and other forms of finance narrowed in the third quarter, while awareness of crowd funding reached its highest level to date with 38% of micro employers and 35% of small employers aware of the schemes.

The report sheds some interesting light on how businesses are actually being funded. 37% are using business funding but when those who use trade credit and personal funds are included the proportion using “business funding” rises to 64%. To put this in context, 69% of SMEs reported using external finance for their business in 2007. Now other forms of funding are making up the gap in these companies’ finances.

In fact 31% reported using trade credit — a greater proportion than reported using core bank products (28%). The data also suggests small businesses that plan to borrow are more likely to have financial barriers to growth than those who are happy not to seek finance; 19% of those looking to borrow see cash flow and late payment as serious barriers to development and 17% expect access to external finance to be problematic compared to the 5% and 3% reporting these to be barriers amongst those not looking to borrow.

Phil Orford MBE, Chief Executive at the Forum of Private Business, said:

“These latest figures show that while the appetite from small businesses to borrow may be on the up, many continue to explore alternatives as opposed to traditional banking products to finance future growth.

“Despite the banks’ continued efforts to win back SME confidence, a large number of small businesses remain unconvinced. Many are increasingly considering options such as crowd funding, trade credit and dipping into their own reserves to fund their future plans, which is likely to stifle the pace of growth in 2015. There is an urgent need for banks to re-establish trust with small businesses, particularly as we enter a period of political and economic uncertainty in the run up to the general election next May. Businesses definitely do not need this additional layer of uncertainty when it comes to business planning.”

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