The failure of quick fix finance: why SME access to business finance really does matter
A new Bank of England survey shines a light on the need for better understanding of business finance by SMEs and how this can affect investment and growth, writes Complete Commercial Finance director Karl Lanham.
Productivity. It’s one of the perennials of business and since the introduction of time-and-motion studies in the early 20th century proprietors have keenly sought ways to improve workflow and increase output. Today, we live in a highly automated world where technology has boosted the efficiency of production and speed of delivery, yet ironically productivity in the UK has risen more slowly than in other countries.
A recent study by the Bank of England in collaboration with the Department for Business and Trade of 2,885 SMEs links access to finance and subsequent funding decisions to their investment choices. Specifically, it examines how access to lending is a barrier which can determine a company’s rate of growth and ultimately affect productivity.
At the outset, the survey asked participants to evaluate the level of investment they had made over the previous three years into technology, plant machinery, vehicles and staff training, along with product development. While 78 per cent said they had invested, 22 per cent said they had invested too little, which in turn impacts their potential for growth.
Barriers to SME funding
Of those surveyed, more than 80 per cent of participants used at least some internal funding to finance investment, with 50 per cent using purely their own cash and, de facto, half of the businesses involved in the study did not use any external finance. One of the challenges for most businesses is maintaining a steady cashflow, and yet a large percentage of the SMEs who responded had restricted their own available reserves by funding investment themselves, rather than using considered and appropriate finance.
One of the reasons regularly cited for underinvestment was access to external finance on reasonable terms, along with economic uncertainty and risk aversion. A large number (58 per cent) said credit was too expensive, while 29 per cent believed their application would be unsuccessful, and the study’s authors reported a clear correlation between those who had underinvested in their business and those who had a negative attitude to external finance.
The reality is that by working with a commercial finance broker whose job it is to navigate the market and advise on suitable products for individual circumstances, many companies can reduce the pressure on their cashflow and boost productivity with suitable investment.
Types of external finance used by SMEs
In the study, businesses were also asked about the type of external finance they used, with credit cards, leasing or hire purchase, and bank overdrafts most commonly cited, indicating a lack of knowledge and understanding of the wide variety of funding options which are available. With 50 per cent of survey respondents using a credit card and 25 per cent opting to lease or use hire purchase, only a tiny percentage utilised invoice discounting, just one example of the many other sophisticated funding options available to businesses.
While the expense of external finance was a key factor, failure to secure the required amount of funding, security requirements, the terms and conditions of lending, and the length of time it took to get a decision, all contributed to business owners’ reluctance to use external funding, and 77 per cent said they would accept a slower rate of growth rather than use borrowing to boost expansion.
The sad reality is that by working with a broker, many of these businesses could secure finance more readily, improve their financial outlook and ability to succeed in one of the toughest economic trading periods in recent history. The study demonstrates a lack of trust in external finance by many SMEs and without professional advice they often seek an immediate, simple quick fix in order to be able to move forward with their plans.
The sentiments which a large number of business owners shared are symptomatic of a lack of information and inability to speak with a trusted, professional adviser. One of our goals at Complete Commercial Finance is to create greater awareness and help clients to understand the wide variety of lending that is available, and to provide the personal contact that is often required to ensure a funding application is successful. It’s shocking to hear that business finance is one of the barriers still holding companies back from a successful future, and with professional, expert advice we are here to help them take the next step.
