SME reliance on debt to fund working capital falls by 25 per cent
The success rate among small and medium-sized businesses (SMEs) applying for finance has risen to 80 per cent in 2014 up from 71 per cent in 2013, according to research by Albion Ventures.
Despite more SMEs receiving the funds they need to grow, the second Albion Growth Report shows that just one in ten SMEs tried to raise finance in the past 12 months compared to 17 per cent last year.
The study, which is designed to shed light on the factors that both create and impede growth among UK SMEs, shows a 25 per cent fall in the number of businesses seeking credit to fund working capital from 32 per cent in 2013 to 24 per cent this year. This suggests that SMEs are moving on from applying for finance to pay the bills to a new, healthier era of business expansion.
This is underlined by the fact that over a quarter (27 per cent) of firms raised finance over the past year to develop their businesses and an additional 23 per cent to expand their premises. These are both up on last year’s figures of 26 per cent and five per cent respectively.
The next 12 months are likely to see a sharp increase in demand among SMEs for new finance with a third (33 per cent) planning to apply for credit - the highest proportion of these based in Greater London.
Despite the publicity about the continuing shortage of bank lending, the percentage of SMEs’ borrowing or funding that was done through bank loans or overdrafts has fallen significantly over the past year from 76 per cent in 2013 to 62 per cent in 2014. Firms have also relied less on asset-based leasing, invoice discounting and credit cards.
The report shows that other lending methods including mortgages (seven per cent), cash loans from friends and family (five per cent) and equity investments from venture capital and angel investors (six per cent) have a long way to go before they catch up with traditional bank loans.
In terms of sectors, the number of retail and distribution companies attempting to raise finance has fallen from 17 per cent in 2013 to 14 per cent this year, as did the number of manufacturing businesses (from 26 per cent to eight per cent). However, manufacturers who applied for credit were significantly more likely to be successful – up to 88 per cent in 2014 from 65 per cent in 2013.
Patrick Reeve, managing partner at Albion Ventures, says: “Demand for bank finance and the reasons for needing it are key proxies for the health of UK SMEs and there are reasons for optimism on both counts. Not only have firms been more successful in applying for finance but their motivations are more about growth than funding working capital.
“Demand for finance is particularly strong among the growing band of so-called ‘threshold’ businesses with turnovers of between GBP500,000 and GBP1 million, which are on the cusp of becoming established companies. Twice as many of threshold businesses attempted to raise finance in the past 12 months and 68 per cent of them needed capital to grow compared to 41 per cent of other types of SMEs.”
Emran Mian director of Social Market Foundation, says: “While growth is back, there are some important puzzles about its character and this report provides valuable clues. While the role of bank finance is diminishing it is still the largest source of capital by far and a continued focus on efficient supply and competition in this sector is vital. The big question is how to enable these businesses to make the most of the opportunities that they see ahead of them.”
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