OVER a third of small firms say new credit is unaffordable, according to the Federation of Small Businesses (FSB).
The trade body has urged smaller businesses to look beyond “traditional debt products”, after research found that 42 per cent of 984 small businesses surveyed in July 2018 said they cannot afford new credit.
Less than a third (31 per cent) of small businesses are being offered interest rates of under four per cent, down considerably from the four in 10 (39 per cent) recorded in the third quarter of 2017. One in three (35 per cent) are being offered interest rates of seven per cent or more on new lines of credit in the third quarter of 2018, up from 24 per cent at this time last year.
Just 13 per cent of small firms are making applications for new finance in the third quarter of this year. The most popular channel for obtaining finance is still bank loans (38 per cent) but increasing numbers are also seeking asset-based finance (30 per cent) and approaching crowdfunding (16 per cent) and peer-to-peer (nine per cent) platforms.
The trade body said that wider analysis showed that half of small firms are ‘permanent non-borrowers’, with almost three quarters saying they would rather grow their business more slowly than borrow to enable faster growth.
“We need to see a fundamental shift in the UK’s small business finance culture,” said FSB National chairman Mike Cherry.
“Too many firms are reluctant to borrow and realise their full growth potential. Those that do are too reliant on traditional debt products.
“We could learn a thing or two from the US where equity finance is booming.
“UK firms need to be encouraged to recognise that this kind of investment can bring not only growth finance, but also advice and support from those with real expertise.”
The findings come ahead of the Bank of England’s latest decision on interest rates later on Thursday.
“A lot of small firms will have been preparing for higher interest rates from today,” said Cherry.
“However, with borrowing costs for small firms already high, it’s critical that any future rate rises are carefully considered and gradual.
“A good proportion of small businesses will welcome the prospect of higher rates taking some heat out of price increases.
“Consumer inflation has been consistently above two per cent for months now with input costs, especially fuel, also on the rise. This inflationary pressure has proved a challenge for small firms, not least retailers who are already up against high employment costs and spiralling business rates.”