Reluctant borrowers: the ICAS research

SME finances
By Ian Harper, CA Magazine

9 August 2017

ICAS' latest research into SME funding shows that reluctance to borrow is as great a brake on growth as restricted availability of capital.

Small and medium enterprises, especially high-growth ones, are considered crucial to boosting UK productivity and enhancing wealth creation. However, a research report just published, and commissioned by ICAS, shows that banks’ lending practices are either forcing many SMEs to downgrade growth targets or put them off borrowing altogether.

According to the report’s joint author, Dr Ross Brown of the School of Management at the University of St Andrews: “More than half the companies interviewed claimed that problems accessing finance reduced their overall rate of growth. It therefore appears that funding could be an inhibiting factor, reducing their growth.”

The report also found that “discouraged borrowers” (SMEs that fear they’ll be rejected for a loan, so don’t even apply) probably do sacrifice growth rather than seek external finance. Brown says recent research suggests there are 30,000 discouraged borrowers in the UK and that up to a third would have obtained funding if they’d applied. “This reluctance to borrow could be generating a growth shortfall within the UK economy,” he warns.

So what are the key issues confronting SMEs in their quest for success that make them reluctant to seek funding? We asked the experts.

Why are SMEs loathed to seek funding?

While it is generally acknowledged that high-growth SMEs have better access to equity investment than their more slowly growing counterparts, the ICAS research clearly identifies the main banks as the major source of all SME finance over the last five years – either by way of a loan (39.8%) or an overdraft (33.7%). Overall, it is estimated that the four main banks account for 80% of all SME lending.

The other key sources of finance for SMEs, the researchers found, were:

  • Supplier credit 16.9%
  • Retained earnings 27.7%
  • Hire purchase 24.1%
  • Equity from family 22.9%
  • Loans from family 20.5%

Factoring only accounted for 16.9% and peer to peer lending, just 2.4%.

So what is it that makes a large number of SMEs reluctant to borrow and hobble their growth prospects? When it comes to the banks the key issues are “transactional lending”, personal guarantees and a lack of trust. When it comes to the alternatives the key issue is lack of awareness. On top of this there may even be a regional lending bias.

According to Ross: “It appears from our own work that personal guarantees required as collateral substantively affect the ability of SMEs to obtain credit, with 70% of SMEs identifying this as a barrier to borrowing. This is one of the main reasons that many governments across the world offer credit guarantee schemes to help alleviate the need for personal guarantees.”

He adds: “While trust is a hugely important factor in borrower-lender relationships, I think the levels of trust were seriously eroded during the global financial crisis”.


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