Four in 10 (37 per cent) small businesses that made successful finance applications during the last quarter used the sums raised to manage cashflow rather than invest in their firms, according to new research.
The Federation of Small Businesses (FSB) has published its small business index for the fourth quarter of 2019, which found that ‘balancing the books’ was the most popular use of credit among small businesses. This was followed by 23 per cent of firms that used finance to update equipment, while even smaller proportions used funds to expand their business (16 per cent) or for recruitment (2 per cent).
Despite efforts to encourage small businesses to apply for a greater range of financing options, the share seeking to access loans and/or overdraft facilities (88 per cent) has hit its highest point since the first quarter of 2016.
Far fewer firms sought asset-based (27 per cent), peer-to-peer (11 per cent) or venture (two per cent) finance.
The findings follow previous research from the trade body that showed the UK late payment crisis leads to the closure of 50,000 small businesses a year at a cost of £2.5bn to the economy.
The latest figures from retail payments authority Pay.UK show that the balance of outstanding late payments almost doubled to £23.4bn in 2019.
“If this government wants to leave a lasting legacy amongst small businesses, it has to make ending the UK’s late payment crisis a top priority,” said Mike Cherry, national chairman of the FSB.
“It’s troubling that so many external finance applications are driven by cashflow concerns.
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“This really shouldn’t be the case – you wouldn’t dream of doing your weekly shop and telling the cashier that you’ll pay for it in 100 days, but corporations take this approach to small businesses in droves.
“The uncertainties facing big businesses over the past few years will have no doubt increased the temptation to use small firms as free credit lines.
“We need to put that attitude to bed, for good.
“We fought hard for a package of late payment reforms under the last administration.
“Frustratingly, it was put on ice due to the General Election.
“We’ll be working closely with the new small business commissioner to resurrect it.”
The FSB’s latest report shows that only around one in eight (13 per cent) small firms made an application for external finance in the fourth quarter of 2019, down from 15 per cent at the beginning of the year.
Four in 10 (40 per cent) small firms describe credit as ‘unaffordable’, up three per cent compared to this time last year, despite the fact that a substantial proportion (41 per cent) of successful applicants are being offered lending rates below four per cent.
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