Are SMEs becoming too risk averse to seek funding?

A new report suggests that a ‘non-borrowing culture’ is growing among small and medium businesses in the UK.

According to the study by Wesleyan Bank, nearly four fifths (78%) of small businesses surveyed admitted to being too risk averse to seek external finance. When it came to their plans for the future, only 7% of small business owners said their aim was for the company to be acquired. Just 2% of respondents said they would be likely to look for equity backing in the future.

The study also found that around two fifths (39%) of smaller businesses said they had used Google to seek out financial advice rather than consulting with a bank.

According to Wesleyan Bank, businesses are right to be cautious about borrowing but failing to seek the resources required for growth can pose just as much of a risk.

Relying on internet-based research could also leave small business owners and decision makers unaware of some of the options available to them. These can include bank business loans and overdrafts, as well as alternative finance options for those that might be facing difficulties.

An earlier release from the British Bankers Association (BBA) revealed that overall levels of lending to SMEs had risen in 2015.

It said that finance applications in the form of loans and business overdrafts were approved for eight in ten small businesses and nine in ten medium-sized businesses, but the number of applications had fallen during the year.

According to the report, the number of SMEs looking for business loans fell by 13% last year compared to 2014. Those applying for overdrafts fell by 9%.

One reason for this fall in the number of funding applications could be the risk aversion highlighted in the Wesleyan Bank report. Another could be the fact that cash deposits had also grown.

According to the BBA, the level of cash held by SMEs in current and deposit accounts totalled £164billion at the end of last year, representing an annual growth of 7%. Some businesses could be relying on their own reserves rather than seeking external funding.

By Phil Smith

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