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New research shows SMEs are shunning bank loans and overdrafts

By CreditMan Tuesday, December 22, 2015

A member of the UK200Group of independent accountancy and law firms have today commented on new research which show that SMEs are abandoning bank loans and overdrafts.

The Albion Growth Report – a study of 1,000 SMEs which aims to explore the factors that help businesses grow– has found that the popularity of bank loans and business overdrafts is declining.

It reports that Bank loans and overdrafts have continued to fall in popularity, down to 49 per cent this year from 76 per cent in 2013, with businesses instead turning to equity finance and other long-term financing options.

The popularity of using third party equity or other long term finance has soared from six per cent in 2013 to 34 per cent in 2015 and one third of firms would consider raising external equity finance.

According to the study the number of SMEs that have secured finance to develop their businesses has also soared to 44 per cent this year, up from 27 per cent in 2014.

The third Albion Growth Report, found that of those who secured finance, nearly a third of firms did so to invest in new equipment, while more than a quarter (26 per cent) used the money to develop new products and services. However, only one in ten had raised finance to invest in research and development (R&D), a key driver of longer term success.

Jonathan Russell, Partner at UK200Group member firm ReesRussell:

It is no great surprise that research reveals more SME businesses are using equity finance and long-term loans as mechanisms to finance their business. In truth, this is a better way to finance long-term and the difficulties in obtaining overdraft finance from the main banks has weened businesses away from short-term finance.

Whilst equity finance can seem expensive, it is long-term and returns are usually linked to profits and most long-term borrowing is less volatile when it comes to interest changes. However, the problem remains that equity finance is still very difficult to access for micro-businesses.

That SME’s are not spending huge amounts on R&D is also no great surprise, but it does not mean that they are not doing significant R&D. Often in small businesses the R&D is undertaken by the original founders and proprietors of the business, which means that costs can be significantly less.