By Francesca James

The recovery of the UK economy could be put at risk as increasing numbers of small and medium-sized businesses are not applying for external forms of business finance in order to run and grow their business.

The latest research by invoice finance specialists Bibby Financial Services has revealed that 65 per cent of firms surveyed had not applied for external funding in the previous 12 months, an increase of some 10 per cent from the final quarter of 2010.

The national survey of small and medium-sized businesses also revealed 16 per cent of firms depended largely on bank overdrafts, while a further 16 per cent drew upon personal savings or money from family and friends to finance their business. Just nine per cent of small and medium-sized businesses had applied for a bank loan in the past year.

Edward Rimmer, UK chief executive for Bibby Financial Services, believes that without access to finance, businesses may fail to develop and grow in the post-recession recovery, and advises firms to view all the funding options available to ensure they have sufficient cash to run their business.

He says: “With the economy still in a state of flux it appears some businesses are wary of approaching the banks for money, taking on additional loans and having to service the debt. So while I support the intentions behind initiatives such as Project Merlin, it remains to be seen whether this is a realistic solution to tackling the ongoing problem of limited access to finance.

“Previous experience would suggest that other government initiatives to support funding for small businesses have not been successful. Evidence of this can be seen in figures from the British Bankers' Association (BBA) which show that average monthly loans to small businesses have declined by almost half since 2008.”

The survey also revealed that almost half (49 per cent) of the lowest-performing companies had not applied for any funding in the previous 12 months to the survey - up from 41 per cent last year, highlighting the link between a healthy cash flow and strong business performance.

Edward Rimmer adds: “Our network of regional directors are in touch with the business communities they serve and what they are telling us is that while the Government talks about stimulating growth, the truth is many business owners are still not aware of the range of funding options available to them.

“Facilities such as overdrafts, for example, are often not the most flexible way to finance a business due to the need to renegotiate the facility with the bank every time increased funding is required, unlike some other funding sources, such as invoice finance, which develops in-line with business growth as the sales ledger is used to secure access to funds. More than 90 per cent of businesses in the UK are small to medium-sized enterprises and, if they do not have access to the financial support necessary to develop, the recovery of the UK economy could be at risk.

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