Could a failure to borrow by SMEs be disrupting the economy?

Small businesses in the UK are more hesitant to borrow after being regularly turned down for finance and this could be impacting upon the economy, according to Funding Knight.


The chief executive of the peer-to-peer lender made the claims after the Bank of England released figures that show a split in borrowing levels between larger and smaller firms.


Data from November 2014 revealed that larger firms were constantly applying for finance but that smaller companies were not.


Demand for business loans from small companies is dropping while pricing has show little variation in the past year.


The Bank of England’s Credit Conditions Survey confirmed the trend and reported that growth in demand for bank lending is expected “for all but small businesses” in the first quarter of 2015.


Back in the third quarter of 2014, the same survey said that 77% of SMEs were not seeking bank loans or overdrafts – a figure that had showed no change for 12 months.


Investment to push ahead of the competition is vital for many businesses but yet only the larger ones are seeking to innovate and grow.


More than half of Britain’s gross domestic product comes from small businesses but there are concerns that a failure to access funding could be preventing growth and prosperity.


One of the issues was found to be that many SME owners were unsure of where to access fair finance for their businesses.


As a result they simply tried to avoid the situation which made progression and growth more difficult.


Borrowing for growth is viewed as a positive step for a business as it often provides funding that would not be achievable from cashflow and profits alone.


This can then allow for the financing of property, new plant and materials, or even for an acquisition – often driving profits, job numbers and wealth.


While SMEs are encouraged to borrow they should attempt to expand beyond their means – such a decision could be unsuccessful and place the company under threat from corporate insolvency.


This might be a rarity but it is important to recognise any potential issues and have plans in place to tackle them if required, while being responsible when applying for finance.


By Phil Smith


If you would like to have a free no obligation chat with one of our advisers please call us on 0207 186 1144.

View all Business Insights