A few weeks ago in November, Experian - an information services company - published a report looking at the sources of finance small and medium size enterprise (SME) use to support their business. The survey of more than 600 SME directors found that a third of them used personal finance sources like mortgages, credit cards and savings accounts to support their business.
Just about the same time BDRC Continental - a market research consultancy - released a report revealing that 8 out of 10 small businesses haven’t sought any finance in the last year.
It’s interesting to note here that two separate reports published by two different sources underpin each other’s findings. As accountants and financial advisors working with the small and medium sector this makes us wonder whether it is the banks that don't want to lend or the small businesses that don't want to borrow. Or is it something completely different?
First things first, however.
The government has seen an increase in the number of new private sector businesses in the UK by 102,000 this year, but it’s initiatives to encourage borrowing have fallen on deaf ears. This is despite the government offering a range of support schemes to facilitate the access of finance to SMEs - so much so that there is a reported estimate of 285 central government schemes and over 1,800 local government schemes in place for UK SMEs.
So why aren’t these small businesses borrowing? While these reports highlight serious challenges facing both SMEs and their funding companies; however, the real challenge, in our opinion, is removing some of the obstacles that have unknowingly cropped up between SMEs and their funding sources. This insight corroborates the findings of the research undertaken by BDRC Continental.
The report, based on over 50,000 interviews with small and mid-sized firms, says that small and medium businesses have shunned bank credit in part because they expected the banks to turn down their requests. Next, a sizeable number were reluctant to borrow from banks because of worries about building up debt in times of economic uncertainty. Other reasons were the hassle of setting up a new borrowing facility, terms and conditions tied to the deal and security demands from the bank.
These findings underlie a dilemma that SME business owners have come face to face with. While many SMEs don’t apply to borrow because they think it would be too expensive, too much hassle, etc, others don’t apply to borrow because they are put off, either directly (they made informal enquiries of the bank and felt put off) or indirectly (they thought they would be turned down by the bank so did not enquire).
So how have SMEs found themselves squared up against funding problems and what can they do to overcome these obstacles?
We think businesses have, for too long, turned only to banks to fund their growth. But since the scale of funding gap is huge - estimates of £29bn to £59bn cited for SME financing - businesses need to also pay attention to non-bank finance sources like commercial providers, social/community lenders, equity funding initiatives, and peer-to-peer lenders. Companies such as MarketInvoice, Funding Portal and Funding Circle have opened substitute channels to raise funds.
Despite the avialability of non-traditional sources of finance, securing finance is difficult for such small and medium businesses. This is mostly due to cash flow issues being ingrained in such setups. However, businesses don’t have to enter the fundraising scenario alone; if as a business owner you decide you want more advanced assistance – and something more personal – you should hire a professional like an accountant or a certified financial planner to provide funding advice for your small business. Based on your business goals, a professional accountant will not only get your business in shape before you apply for any kind of funding but will also manage your day-today finances so that when you apply your chances of success also increase. Beyond that an accountant can also present you business’s financial information clearly, help you understand the prevailing market conditions, as well as determine the financial health of your business, prepare financial statements and tax returns for presentation, help you budget your expenditure wisely, identify regulatory requirements and lastly make recommendations for improvements.
Despite the availability of professionals, businesses don’t seek professional advice before applying for finance. We’ve seen business owners come to us looking for finance without regular management reports, viable business plans and a trained point-of-contact who manages their finance. It’s understandable that business owners do everything themselves to keep costs down; however, in reality all they end up doing is wasting time handling business finances when ideally they should be focusing on the business itself.
This insight is substantiated by ACCA who used the BDRC report mentioned earlier to reveal that only those SMEs with routine management reports, formally written business plans and financially trained staff have been able to sustain growth rates of over 30% for three years in a row. In comparison, only 7.5% of SMEs without financial expertise and trained staff have achieved sustained growth during the same extent. Moreover, independent research over the years has also confirmed that a well-run finance function staffed with trained people makes SMEs more trustworthy and investment-ready.
The evidence and reports presented in this article will hopefully motivate you to use a professional as he/she will not only help you eliminate major obstacles when it comes to securing the right kind of finance but will also equip you to get the funding you need quicker.