Independence Remains a Strong Motivator for SME Borrowing in 2015

Almost half of UK small businesses don’t leverage bank finance. In BDRC’s SME Finance Monitor Q1 2015, there’s a precise breakdown of who’s doing what. But that half-and-half headline doesn’t tell the whole story.

Recent figures suggest that more businesses are becoming profitable and independent, with stronger credit ratings. At the other end of the scale, fewer businesses are reported as having bad credit.

Both sets of figures point to a stake in the ground moment for the UK’s economic recovery. But with plans to grow outlined in the BDRC document, could striking lending off as an option altogether be detrimental?

The figures indicate why small businesses borrowing has tailed off in 2015, to date. At first glance, you’d say it’s a fifty-fifty split (okay, 52/48%, to be precise) as to how many businesses are relying on external finance.

Paying off existing debt is a high priority for many

Looking under the skin, however, that’s not the whole picture. There are more reasons that aren’t as black and white as half are/half aren’t using banks to finance their business operations.

One of the key reasons businesses aren’t borrowing is because they’re working hard to pay off external debt. In BDRC’s Q1 2015 report, 48% of SME are now classed as PNBs – or permanent non-borrowers.

The criteria for making this benchmark is not having borrowed for five years, with no intent to do so in the foreseeable. Moreover, just 14% of businesses, roughly one in seven, have got external borrowing on their to-do list. More than a quarter have no plans to borrow whatsoever.

For those who’ve been following the market for small business lending, this attitude will come as no surprise. In 2014, the overall amount lent to small businesses dropped by 2bn. A large percentage of that overall decline in borrowing came in the final quarter when, year on year, lending was down by £810m.

Those who can, do

The reason the half did/half didn’t doesn’t show the full picture is because, of those businesses that weren’t in the PNB class, lending (by percentage of SMEs) almost doubled, rising from 35% from last year’s 18%.

This could well be greater awareness of the financial products on offer to small business coming in to play. The Funding for Lending Scheme, which runs to the end of this year, has been cited as a flop in some quarters. But it still has a way to go yet before we get the black caps out.

More than half of the businesses, 5,000 in all, that made up the BDRC poll were aware that government funding was available. Almost a quarter knew of the Funding for Lending scheme explicitly.

Approvals rise, showing banks ARE open for business

Those business who are choosing to access external finance are having, on the whole, a better time of it, too. In March this year, the Federation of Small Businesses highlighted a 33% rise in loan approvals based on 1,635 of its members.

FSB’s rolling quarter figures showed that 12 in every 20 loans were approved up to the point of their publication. That’s compared with only nine in every 20 for the same time the previous year.

BDRC’s figures back up those issued by the FSB, and some. More than three quarters (76%) of their respondents reported success in applying for new loans or refinancing existing ones. The driver here was new applicants over the 18-month qualifying period.

Other options of funding are becoming available. 2% of the BDRC’s respondents had dipped into the crowdfunding pool. Great if you have time to amass funds and are prepared to share your business stock in return for someone else’s stake.

But crowdfunding is not so great if you want to retain sole ownership of your business. As the figures suggest, there remains few options as critical to the independent success of small business than bank loans and overdrafts.

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