By Daniel Hunter

The UK's small and medium-sized enterprise (SME) owners are over-reliant on their personal savings and overdrafts, according to new research from Bibby Financial Services.

Its study of more than 1,000 businesses found that 14% of UK SME owners use savings or take a loan from a family member or friend. Nearly a quarter (23%) said they regularly use a bank overdraft to fund their business.

Thirteen per cent use a traditional bank loan, and invoice finance and unsecured personal finance is used by 7% respectively.

Just 1% of those surveyed used crowdfunding or peer-to-peer lending to raise finance for their business.

David Postings, UK Chief Executive of Bibby Financial Services said: “Many SMEs are over-reliant on unsustainable or restrictive sources of funding, such as personal loans and overdrafts. These sources of finance offer limited flexibility and cannot support a business’s growth in the long-term.”

Almost a quarter (24%) say they do not use external finance. In a separate poll, almost one in five (17%) cited unreliable cashflow as the greatest threat to their business. This was the top answer followed by business taxes eroding margins (13.9%) and late payment from customers (10.9%).

Over 15% of those polled said that concerns about being declined the finance they need prevent them from seeking external finance, with 14% claiming that they don’t want to use a bank.

Mr Postings said: “Cashflow is a significant concern for a lot of SMEs, but it’s clear that many are not leveraging the flexibility and stability external finance offers.

“There is a substantial amount of working capital available that independent funders are willing and able to lend, but SMEs simply aren’t drawing on this funding. This is partly because SMEs are worried they will be denied funding and partly because they don’t want to go to a bank — and would sooner ask a friend or family
member to lend them money.

“While borrowing money from friends and family might be an easier solution initially, in the long term this solution might become an impediment as fast growing SMEs’ funding needs change and their funding requirements become more sophisticated.

“The new Conservative Government must acknowledge that there is residual fear within the SME community when it comes to accessing external funding for their businesses. Simply planning to bring more so-called ‘challenger’ banks to the High Street will not tackle SMEs’ funding challenges. Instead the Government should prioritise making SMEs aware of all the funding options available to them, rather than becoming further indebted to friends and family.”