Source of finance - SMEs turn to the private alternatives to banks

A fascinating piece of research on the sources of finance used by small businesses has hit my desk this morning. Great materials for Edexcel/AQA GCSE Unit and for AQA BUSS2 - the textbooks look even more outdated now!

The research, from CreditPal, reveals in the last 24 months SMEs have sourced £45 billion from alternative sources of finance. SMEs owners and managers have been forced to sell private assets, or rely on friends and family for emergency finance, in place of funding from traditional financial institutions through bank loans and overdraft facilities. On average each SME utilising alternative forms of finance has raised capital totalling £66,624 in the last two years, the equivalent of £2,776 a month.

More SMEs turned to alternative sources of finance in the last two years (41%) to raise capital than applied for bank or building society loans and overdrafts (35%). This trend may be explained by SMEs being overly fearful of being declined for credit, which is discouraging them from making applications.

Keeping a startup or small business alive during the recession has required entrepreneurs to make even greater personal sacrifices. Business owners and managers have sacrificed family expenditure to help keep their firms afloat in the last two years. Family holidays have been sacrificed by 15% of those seeking alternative forms of finance. One-in-ten (11%) SME business owners and managers have been forced to go cap in hand to friends and family for funds to ensure they have sufficient cash flow to meet their commitments. Pension funds have been raided (3%) and children (1%) have been pulled out of private education as the recession has hit revenues.

Chris Poll, CEO of CreditPal, quite rightly points out - “In the long term the sale of private assets is not sustainable and relying on friends and family for funding can prove a financial and emotional risk if there are problems with repayments.” SMEs have even turned to private lenders (4%), including loan sharks that charge punitive rates of interest, to raise funds. One in twenty (4%) SME business owners have been forced to dilute or sacrifice equity stakes in their business to source additional finance. Some business owners have been forced to sell privately held assets (8%) such as cars or property to fund their businesses. Thought provoking material. Lets hope the examiners take notice and reward students for identifying the importance of these sources of finance in their answers rather than relying on the textbook answers of “bank overdraft and bank loan”.