SMEs turn to personal loans to finance business
New research released today reveals that, with banks becoming more reluctant to lend to small firms during 2009, a growing number of cash-strapped small business owners turned to friends, family and personal credit cards to fund their businesses during the recession.
The study, conducted by commercial credit referencing agency Graydon UK and business support organisation the Forum of Private Business (FPB), questioned over 750 UK businesses on their individual experiences of financial and credit management during the last six months of 2009, as well as their expectations for 2010.
The results reveal that inhospitable bank lending conditions prompted 28% of business owners to turn to friends, relatives and company directors to secure funding for their business, with a further 8% of businesses seeking financial support through directors’ personal credit cards. According to the study, 40% of those looking for credit during the second half of 2009 were unsuccessful in accessing finance, with 52% refused business loans and 38% refused extensions on their overdraft facility.
Graydon UK believes that this move towards individual financing may have contributed to the growing number of personal insolvencies reported by the Insolvency Service in the third quarter of 2009, which contrasted notably with an unexpected fall in corporate insolvencies of almost 5 per cent within this same period.
Martin William, Managing Director of Graydon UK, commented: “With over a third of small business owners taking on personal risk to stay afloat, official corporate insolvency figures may have been masked by growing numbers of individuals putting their own finances on the chopping block, instead of those of their business. The release on Friday 5th February of insolvency statistics for the fourth quarter of 2009 should shed more light on the extent to which corporate failures have indeed been cushioned by personal insolvencies.”
The FPB’s Chief Executive, Phil Orford, commented: “The continuing credit drought means more entrepreneurs are being forced to seek alternative sources of finance – including family, friends and personal loans. The latest insolvency figures show that this level of personal risk is unsustainable. The danger is that the UK will become increasingly uncompetitive as fewer people are encouraged to start their own businesses.”
Graydon UK and the FPB’s research also found that businesses are anticipating another difficult year ahead, with almost a fifth (19%) expecting access to finance to be the main obstacle to their business during 2010.
According to the study, SMEs will require an average of £113,731 in additional funding during 2010, with the bulk of this (60%) expected to come from the banks, and 16% to be provided by relatives and friends. Just 7% of this additional funding is expected to come from Government grants, while it is thought that six per cent will come from the supply chain.
Martin Williams added: “SMEs are continuing to rely on banks for the bulk of their funding but should bear in mind that bank lending conditions are likely to remain unfavourable for at least the first quarter of 2010.”
“However SMEs should, however, remember that the refusal of a loan need not be the final decision. If refused credit, businesses must demand answers from their bank as to why they failed to secure funding, as this will open the door for them to return with a revised business plan and more detailed financial information. Alternatively, a good credit score can directly impact on a business’s ability to secure credit, both from banks as well as the supply chain.”
The FPB’s Phil Orford, concluded: “While we can accept that more small businesses should be willing to hand over better quality financial information in order to boost their credit rating and their chances of securing finance, banks must also play their part by assessing lending risk more openly and accurately.”