One cannot escape the fact that Britain is in a double-dip recession. The pressure of these conditions as well as late payments and the general cash-flow management problems associated with a growing business has led a large number of SMEs to apply for ‘quick-fix’ solutions to overcome their cash flow problems.
The SME Finance Monitor is a report that each quarter interviews over 5,000 SMEs on their views about access to finance both in the recent past and the future (in Q1 2012 the monitor was able to draw on statistics from over 20,000 interviews). According to SMEs interviewed in the report the main barrier to running their business, as they would wish, remains the current economic climate – a ‘major obstacle’ for 37% of all SMEs in Q1 2012. The current economic climate is more of an obstacle for those with any appetite for finance (either planning to apply/renew, or a future ‘would-be seeker’ of finance), mentioned by 48%, and this group was also more likely than SMEs generally to see cash flow/late payment and access to external finance as major obstacles for their business (24% and 22%).
In order to secure a short-term finance solution it is correct to say that businesses still think ‘loan’ first when trying to raise working capital. Trends have come to light by research company Hilton-Baird Financial Solutions. 454 SME owners and financial directors were questioned in the research and over half said that they relied on personal loans, credit cards and overdrafts to fund their business, while only 18% used other business financing options like invoice finance and crowdfunding.
For example, Ground Coffee House, a purveyor of fine coffee in Brighton, submitted a business plan to their bank but were unable to secure funding and so they had to take out personal loans and max out their credit cards, as they did not have any cash for the opening of the new coffee shop. Peer-to-peer lenders (a form of alternative finance), Funding Circle helped them secure funding.
Loans and overdrafts as well as other options such as payday lenders are deemed as an easy way by SMEs to try and remedy their cash flow problems. An alarming short-term view as highlighted by the Hilton-Baird research which shows that those who use bank overdrafts and other short-term solutions often face lower turnover, sluggish productivity and restricted business growth. Small businesses need to be aware and explore all available alternative options.
As the SME Finance Monitor noted, 10% of SMEs, initially declined for loans and overdrafts, reported that they had been referred to any sources of help or advice by the bank, while a further 8% sought their own external advice, without a recommendation. On the 8% of advice seekers, 64% found this external advice of use. There appears to be a woeful lack of referrals from banks to alternative finance companies, maybe the service leaves a lot to be desired or that there is simply just a lack of awareness. Between Q4 and Q1 awareness of alternative sources of business finance showed a clear majority of SMEs, 47%, were unaware of any Business Finance Taskforce commitments, together with other relevant initiatives and alternative finance companies.
Many relatively young tech start-ups offer options that are different from traditional bank products, from new entrants to the banking market, to crowd-sourced equity providers, peer-to-peer lending, as well as invoice finance, which effectively releases cash against a business’ sales ledger. Many of these young companies offer small and medium sized enterprises another option when it comes to raising finance, awareness is the key issue for getting these companies to become are real mainstream alternative to bank finance that is not ‘quick-fix’.