Why Are UK SMEs Shunning Finance?

U.K. SMEs are largely turning their backs on external financing, a new report from BDRC Continental finds.

BDRC’s report, the SME Finance Monitor, released last week, analyzes Q4 2016 SME lending trends for banks and regulators in effort to guide their debates and actions in this industry. In the context of Brexit, more small- and medium-sized businesses are shunning external financing and getting cash in other ways — or not at all.

According to researchers, 47 percent of SMEs surveyed qualified as permanent non-borrowers. This has been a trend in recent years, with BDRC noting that the statistic is on par with data from 2015 and significantly higher than 2012 levels. Unsurprisingly, the smallest of SMEs, those without any employees, are more likely to be permanent non-borrowers; still, a third of SMEs with employees also qualified for this group.

Since the Monitor launched, BDRC found the lowest-ever level of SMEs applying for a new or renewed bank loan in the last 12 months — just 5 percent.

Borrowing SMEs

The data suggests many smaller companies in the U.K. have decided not to seek financing, but that doesn’t mean all SMEs have shunned the process.

According to BDRC, a third of small- and medium-sized businesses were making use of external financing in Q4 2016, with those levels on par with those seen in 2015. Forty-three percent of SMEs surveyed said they would be happy to use external financing to help their companies grow, and the businesses that are already using external financing were more likely to agree with that sentiment.

About a tenth of SMEs said they were planning to grow in 2017 but were not currently using external financing. These companies, however, said they would consider pursuing external financing as part of their expansion plans.

Small- and medium-sized businesses approach to financing largely depends on their current financial state. Researchers found that 80 percent of SMEs said existing plans for growth are based on what they could already afford themselves. The majority (71 percent) said they would prefer to finance themselves and experience a slower growth rate than obtain external financing and grow at a quicker pace.

Nearly half of SMEs agreed that even a reduction in the cost of external financing wouldn’t convince them to apply for external financing. Small business owners appear to be pleased with their decision not to pursue external financing: 84 percent of SMEs were categorized as a “happy non-seeker of finance,” the report found. Further, these business owners remained confident that if they were to pursue financing from the bank, they would probably be approved for a loan — suggesting that the decision not to pursue external financing isn’t one made out of self-doubt or concern over approval rates.

SME Growth

With so many smaller companies choosing not to seek external financing, it would seem that these companies are fairly confident in their ability to survive and thrive. BDRC found that 70 percent of SMEs didn’t identify any type of obstacle as a “major barrier” to their companies, though the economy, political uncertainty and regulation remain common concerns.

Larger SMEs, however, tend to be more concerned, especially among the businesses that trade internationally. More than a third of cross-border trading SMEs said the economic climate is a major barrier to their business, up from 17 percent in 2015. Nearly the same said political uncertainty is a top barrier, up from 8 percent in 2015.

And while many SMEs correlate financing with the ability to grow their business, the number of SMEs that say they plan to grow has steadily declined over time. In 2013, 49 percent of SMEs said they are planning for growth. In 2016, that figure dropped to 43 percent. And while exporting and importing SMEs say they face larger obstacles, these companies are also more likely to be planning for growth, with 70 percent reporting growth plans in 2016.