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Business owners to shun bank lending during upturn

New research shows that, despite increasing confidence in the economy, only a minority of business owners would consider applying for a bank loan to fund growth this year, and instead would prefer to spend their personal savings.

A study, carried out by KPMG, found that small business owners appear to be very cautious when it comes to seeking external sources of finance. Although 9 out of 10 of respondents to its SME poll said that they expected their businesses to grow over the next year, a mere 21% said that would consider applying for bank lending to help their businesses expand.

The survey, which took into account the views of 165 small firms, found that 46% of business owners would rather use their personal savings if necessary rather than take on external debt.

Iain Moffat from KPMG said that many business owners are cautious as a result of the lessons they learned during the recession, and are likely to continue being risk averse: “There is still a great level of caution with many businesses unable to forget the lessons learned in the recession and continuing to be risk averse.”

Of course, many potential customers have become disillusioned with the banking market as a result of the credit crisis, and the difficult lending conditions that followed: “Companies are still very uncertain about the banking market, which some view as being unsupportive to small businesses during the recession.”

Businesses would ‘do almost anything’ to avoid bank lending

The survey findings back up other recent studies, including Baker Tilly’s ‘Your Business Outlook 2014’, which also found that business owners were unprepared to invest significant sums in their businesses despite the economic upturn. Of the 750 business owners polled by Baker Tilly, 84% were unprepared to take on any further external debt this year.

Similarly, research carried out by Kingston Smith in late 2012 found that 70% of small businesses used their own funds to get started, and only 30% used external sources of funding. Tellingly, the study found that business owners would ‘do almost anything’ to avoid having to approach a bank for help.

The importance of cashflow management during the upturn

When asked how small business measure growth, just under one third of KPMG’s respondents said this would be determined by an increase (or decrease) in revenue. Of course, overtrading is one possible consequence of relying purely on turnover to measure performance, as businesses could potentially take on more orders than their cashflow management can allow them to.

Iain Moffat said that, above all, small businesses should ensure that they don’t run out of cash: “With the prospects of better conditions returning the outlook will be brighter but there is a need to keep close control on cash, accurate cash-flow forecasting and the need for continued monitoring of the cost base.”

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