SMEs turn away from traditional financial services

Research has discovered that small and medium size enterprises (SMEs) have recently begun to turn away from more traditional “core” forms of finance compared to financial trends surveyed two years ago.

Overdrafts, loans and/or credit cards are were used by 36% of SMEs compared to the more current figure of 30% demonstrating a noticeable drop in smaller businesses use of more common finance devices.

Other forms of finance such as leasing and invoice finance has remained a more stable trend by comparison and is currently used by 18% of SMEs.

The largest SMEs which possess between 50-249 employees are the most likely to apply for external finance, however there has also been a significant drop in SMEs willingness to apply or plans to do so in the future.

In the first half of 2014, it was reported that 22% of SMEs were aware of crowdfunding as an alternative finance system, which involves the company raising many small amounts of money from people all over, in order to fund the business, often by using the internet as a platform. Despite the validity of crowdfunding only 1% of SMEs has utilised this method with a further 7% considering crowdfunding in the future.

Eight out of ten SMEs fell into the category of ‘Happy non-seekers’ a term used to describe businesses that did not apply for finance services the past year and have experienced no issues when applying for loans and lending during that period. The proportion of Happy non-seekers continues to rise as two thirds of business could be comfortably described as happy non-seekers in 2012, this than increased in 2013 to encapsulate three quarters.

The number of ‘Would be –Seekers has also decreased over time; a term denoting a business that wanted to apply for finances but felt as though something prevented them from doing so. Indeed, the main reason many SMEs fail to apply for financial services is simply due to discouragement and the fear that their application will be denied or the time and hassle involved in the application is impractical.

Fortunately more and more SMEs applications are becoming successful with 68% of business expecting to be future happy non-seekers over the next three months. While this is proving fortuitous for SMEs the slope in the use of traditional finance continues to decline in the wake of newer more innovative finance, such as crowdfunding, though at present the SMEs utilisation of crowdfunding remains at 1%.

Words: Daniel Pearce

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