Nearly half of SMEs believe the economy is being stifled by reluctance to borrow

A third of UK businesses are limiting their growth rather than take funding due to a ‘fear of funding’.

It seems that SMEs are at a crossroads when it comes to external funding. We recently conducted research with BDRC Continental to gain insight into how businesses view external funding, and found that although SMEs know they may need a cash injection to move their business forward – or just keep on top of the basics, such as paying wages – there is lingering apprehension about going to external funders.

Almost half (48%) of the SMEs we surveyed felt that British businesses are missing out on opportunities because of a reluctance to borrow, and 45% believe that the economy is being stifled because they won’t borrow.

Yet, almost a third (27%) of those SMEs are holding back the growth of their own business, due to a ‘fear of funding’, by refusing to take external finance.

So, what are the factors behind this fear?

The main reasons include a belief that external funding results in a loss of independence (47%), can cause more worries (44%), and that taking external funding is too risky in the current economic climate (37%).

Interestingly, it isn’t concerns around accessing finance that is causing hesitations. In fact, confidence in securing finance is high; 59% of SMEs were sure they would get the money they needed, if they applied, and 57% felt they had a good understanding of the finance options available to them.

The SMEs we interviewed understand that borrowing can support their growth. On average, 27% of SMEs that do borrow, attribute external funding as a key reason for their business growth. For larger SMEs (with 50-249 employees) this number rose to over a third (35%).

Over a fifth (21%) of businesses that have borrowed recently, also felt that without external funding, they would not be in operation today. There is clear evidence that external funding can have a hugely positive impact on an SME.

It’s not good news for the UK economy if these businesses understand the benefits of borrowing, yet do not seek the funding that could have a positive effect on their operation.

But this is no surprise; years of economic instability which preceded Brexit have led to a general uncertainty on ‘what next’. The call for a snap election has added further to a feeling of change across the country.

The greater challenge we now need to tackle is that SMEs have a fear of funding and are therefore not seeking finance when they need it. This is contrary to messages that lenders aren’t lending, which is simply not the case; borrowing figures are down due to demand.

This mixed communication is contributing to confusion and takes attention away from educating SMEs about the positive impact borrowing money can have.

As well as the peace of mind that comes with knowing that the basic bills will be covered, the right funding can be used for positive business investment, for example, to upgrade machinery, fulfil a large order or negotiate cash-upfront discounts with suppliers, all of which help to lead to growth.

The funding sector and the government need to come together to help change the negative perceptions around borrowing.

Only then can we start to instil a sense of confidence in borrowing in SMEs, and support them to grow.

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