SMEs in the U.K. seem to be struggling with the concept of “good debt.” A new report from Wesleyan Bank found that more than three-quarters (78 percent) of SMEs surveyed said the risk linked to debt prevents them from seeking a loan — and just 2 percent obtain external finance on a regular basis.
With a reputation to uphold as the economy’s backbone, SMEs could be making a mistake or two in their avoidance of bank loans and other types of debt.
“Moving up a gear takes investment, whether it be in physical assets, staff, research and development or sales and marketing,” the financial institution stated in its report, released last week. “And, unless you have very deep pockets indeed, it’s nigh on impossible to grow a business without external finance.”
But researchers found troubling patterns in the ways SMEs access the capital they need, and it goes beyond issues of complicated lending processes or distrust of a bank.
Wesleyan Bank found that “only 75 percent” of SMEs surveyed said they would never look to illegal activity to help their business in some way, “suggesting that one in four business owners could do so.”
Analysts pointed to crime and gambling as some measures small business owners would take to prop up their companies.
Just over half of small business owners over the age of 29 said they would never break the law on behalf of their company. And just 77 percent said they wouldn’t turn to gambling to obtain funds for their business.
There are other ways that business owners are showcasing desperation in their efforts to save their enterprises, too.
Researchers pointed to remortgaging or selling their family homes to raise the capital for their companies. Personal credit cards are also a popular way for entrepreneurs to finance their companies.
Nearly one-fifth of those surveyed said they would consider putting their home up for sale to finance their business, while credit cards and bank overdrafts were cited as more popular than even bank loans as a source of financing.
Wesleyan stressed the obvious dangers of these actions, both legal and illegal.
“Such desperate measures can be far more risky than a formal commercial arrangement,” the report concluded. “A criminal record isn’t exactly a bonus in business,” while selling a home, taking on more personal debt or borrowing from friends and family each have their own clear risks.
There are a multitude of reasons why small business owners would turn to risky practices.
One of the biggest reasons, the bank stated, is that entrepreneurs’ personal and business lives are not easily separated, making it possible to turn to the personal side — consumer credit cards, homes or family members — to seek business capital. And the statistics, Wesleyan said, suggest that small businesses have gotten used to a lack of traditional bank funding following the 2008 financial crisis.
But, with the economy in recovery, one of the most pervasive culprits behind this behavior — and the fear of debt — is simply a lack of understanding of the modern SME financing climate.
According to Wesleyan analysts, the fear of taking on debt could be due to a lack of education among the SME community. Other statistics released in the report seem to support this theory.
Most of the businesses surveyed had “zero knowledge” of alternative lending types, like asset-based financing, researchers found. Less than half had a complete understanding of traditional financing methods; just 37 percent reported having a full understanding of the traditional bank lending space.
“Lack of understanding leads to lack of trust,” Wesleyan Bank stated.
The report attributed the high level of SMEs that lack an understanding of their financing options to the reason why these businesses also feel uncomfortable with lenders.
For example, just 24 percent of those surveyed said they feel comfortable working with an alternative finance provider.
But the research finds distrust and dissatisfaction with traditional financial institutions, too. Nearly one-third of SMEs said they have not obtained external financing because of the “attitude of their bank,” said the report.
“This suggests owners haven’t tried other alternatives after being reduced by the bank or haven’t even looked because they see the bank as the only option and assume the answer will be no,” Wesleyan concluded.