Balancing the books number one use of small business credit as late payments top £20 billion

Press Releases 17 Feb 2020

FSB's publishes its full SBI Q4 2019 report.

  • ‘Managing cashflow’ most common use of external finance, according to full Federation of Small Businesses (FSB) Small Business Index (SBI) published today
  • Applications for external finance drop-off as share of firms describing credit as ‘unaffordable’ rises, despite more being offered sub 4% lending rates
  • Proportion applying for traditional finance products hits four-year high; lender approval rates fall after year of economic uncertainty   

Four in ten (37%) small businesses that made successful finance applications last quarter used the sums raised to manage cashflow rather than invest in their firms, according to new figures from FSB’s full Q4 2019 SBI report released today.

Fewer than one in four (23%) used finance to update equipment, while even smaller proportions used funds for expansion of their business (16%) or recruitment (2%).  

Previous FSB research shows that the UK late payment crisis leads to the closure of 50,000 small businesses a year at a cost of £2.5 billion to the economy. The latest figures from Pay.UK show that the balance of outstanding late payments almost doubled to £23.4 billion in 2019.      

FSB National Chairman Mike Cherry said: “If this Government wants to leave a lasting legacy amongst small businesses, it has to make ending the UK’s late payment crisis a top priority.      

“It’s troubling that so many external finance applications are driven by cashflow concerns. This really shouldn’t be the case – you wouldn’t dream of doing your weekly shop and telling the cashier that you’ll pay for it in 100 days, but corporations take this approach to small businesses in droves.  

“The uncertainties facing big businesses over the past few years will have no doubt increased the temptation to use small firms as free credit lines. We need to put that attitude to bed, for good.

“We fought hard for a package of late payment reforms under the last administration. Frustratingly, it was put on ice due to the general election. We’ll be working closely with the new small business commissioner to resurrect it.”

The new research shows that only around one in eight (13%) small firms made an application for external finance in Q4 2019, down from 15% at the beginning of the year.

Firms in the West Midlands were the most likely to seek finance, with close to one in four (24%) making an application. Those in Scotland (13%), the North East (6%) and North West (5%) were far less likely to do so.     

Four in ten (40%) small firms describe credit as ‘unaffordable’ – up three percentage points compared to this time last year – despite the fact that a substantial proportion (41%) of successful applicants are being offered lending rates below 4%. The latter figure is up 15 percentage points compared to Q4 2018.      

The share of small business finance applications that were approved fell eight percentage points between Q4 2018 and Q4 2019 to 63%. Fewer than one in three (27%) firms describe credit availability as ‘good’ – down three percentage points compared to the same period 12 months ago.   

Despite efforts to encourage small businesses to apply for a greater diversity of financing options, the share seeking to access loans and/or overdraft facilities (88%) has hit its highest point since Q1 2016. Far fewer firms sought asset-based (27%), peer-to-peer (11%) or venture (2%) finance.

Major banks issued £18.5 billion of new term loans to smaller firms in the first three quarters of 2019, down from £18.8 billion in the same period during 2018, according to UK Finance. The British Business Bank was supporting £6.6 billion worth of small business finance stock as of March 2019.      

Mike Cherry added: “The small business finance market is beset by both supply and demand challenges.

“On the one hand, you have a substantial share of successful small firms who could be growing more quickly if they accessed external finance, but are reluctant to do so. Lack of trust in financial services is an issue here, as are bank branch closures, which prevent small businesses from building in-person relationships with lenders. The general perception that borrowing is expensive – even when that’s not the case a good deal of the time – is also a persistent challenge.   

“And on the other, big lenders are often more cautious about lending to small business owners if they approach them in a professional rather than personal capacity.      

“That’s why the role of the British Business Bank has proved so critical, providing finance to aspiring entrepreneurs – particularly in areas of the country where investment is hard to come by – many of which have been turned down by traditional providers. It’s vital that initiatives like the Start-Up Loans Company are put on a sustainable footing at the Budget.  

“More widely, we need to see a concerted effort from all sides to make small firms aware of all their finance options.

“We also need to see more from the Bank Referral Scheme. The concept is the right one, but results to date have been underwhelming.”   


Notes to Editors
1) FSB surveyed 1,029 small businesses for the Q4 2019 Small Business Index between 26 November and 9 December 2019. The survey covers a range of economic indicators including: small business confidence, employment and wages, exports, productivity, spare capacity, finance and investment. The SBI is conducted by independent research company Verve. The headline SBI confidence figures are based on a weighted index, with the share of firms reporting ‘much improved’ or ‘much worse’ confidence allocated double weighting.
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As the UK’s largest business support group, FSB is the voice of the UK’s small businesses and the self-employed. Established over 40 years ago to help its members succeed in business, FSB is a non-profit making and non-party political organisation that’s led by its members, for its members. As the UK’s leading business campaigner, FSB is focused on delivering change which supports smaller businesses to grow and succeed.

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