A quarter of SMEs turning to personal finance to rid debt and sustain business
A quarter of SME directors have used personal finance to support their businesses, according to recent research.
This included using mortgages, credit cards and raiding savings accounts according to Experian, who questioned SMEs in an attempt to understand their business ventures more effectively.
Some businesses were using the finance to clear debt and stave off the possibility of processes such as company administration and liquidation.
Approximately 26% of businesses used the money in this way, suggesting businesses are constantly aware of the possibility of having to restructure should the economic recovery slow or abate.
Some directors were even putting their homes at risk to support their companies as almost a third used personal mortgages to fund financial processes in the business.
Meanwhile, almost half of directors admitted they used high-interest personal credit cards for everyday business affairs, suggesting confidence in the economy has not entirely returned.
Personal bank accounts were seen as a common source of finance as 65% said they would draw funds from their current account to fund business.
Furthermore, 48% said they had dipped into their personal savings, which was found to be most common when larger investments were required.
The study also looked at the ways that various levels of finance were found and investments of £10,000 or more were more commonly funded via mortgages or savings.
What about the lower tier?
For smaller investments of £5,000 or less, current accounts and credit cards were the most common solutions.
Funding was used to cover business set-up costs, mainly for investing in new equipment and buildings and to pay suppliers – as well as clearing debts.
Ade Potts, managing director of Experian’s SME business in the UK and Ireland, said he believes the research shows SMEs are increasingly resourceful but warned against using personal finance.
“Although it might initially seem like using personal funds for business purposes is the easiest route, it can affect personal credit records and leave them vulnerable, particularly when you consider people are using their homes as security,” he said.
“By giving their commercial credit score a health check, businesses can make themselves more attractive to lenders and keep their personal savings in the bank.”
By Phil Smith