Small businesses struggled to access finance in the months before the credit crunch began to bite, according to a survey carried out by Cambridge Universitys Centre for Business Research.
The research into the banks financing of small businesses was commissioned by the Department for Business, Enterprise and Regulatory Reforms (BERRs) Access to Finance Expert Group, of which the Forum of Private Business (FPB) is a member.
According to figures from the survey, 29% of respondents seeking finance in 2007 were wholly or partially rejected, compared to 26% in the previous survey, which took place in 2004. The funding needs of small businesses soared during the three years between the surveys. On average, firms sought 470,000 in 2007, compared to just 82,000 in 2004. The FPB is warning that the situation for small firms is likely to have deteriorated even further since the most recent survey, as a result of the economic downturn.
"The research shows that, although the funding requirements of small businesses rose steadily during 2007, the likelihood of banks awarding funds fell just as steadily," said Nick Palin, the FPBs Director of Finance and Administration. "The credit crunch has made accessing finance much more difficult. It is important that the Government streamlines the application process and that small firms consider switching banks, or seek out the alternative funding streams. Businesses are also not cutting costs where they could for example, 200 million in small business rate relief goes unclaimed each year."
In addition, according to the research, the majority of small firms are not taking advantage of capital allowances available on business assets. Only a third of respondents were aware of capital allowances, with just 9% claiming them. Even fewer (2%) claimed allowances for investing in green assets.
Although the number of firms seeking external finance fell in 2007 across most industry sectors, in manufacturing it increased from 39% to 45%. Of the businesses surveyed, 56% sought new or extended overdrafts during the past three years, compared with 32% between 2001 and 2004. However, 10% of firms were rejected when seeking new or extended overdrafts and 16% were denied credit cards.
Businesses had most success with the least-used sources of finance asset-based finance, or factoring, and equity (93%). Other sources included leasing and hire purchase (88% success, but 10% outright rejection), and loans and mortgages (85% complete success, and 4% outright rejection).
The research found that other factors relevant to small firms finances were:
- The proportion of small businesses seeking finance increases with the size;
- Construction and other sectors have a significantly lower proportion seeking finance than in manufacturing;
- There are no significant differences across regions, or between deprived and other areas, in terms of the numbers of firms seeking finance;
- More profitable companies are less likely to seek finance;
- There are no significant gender differences associated with firms seeking finance;
- Entrepreneurs seeking to improve their businesses, those sourcing advice from others and firms with a qualified finance manager are more likely to seek finance;
Super growth firms are more likely to seek finance.
Super growth businesses were defined as those experiencing turnover growth of 30% or more in each of the previous three years, and intending to grow in the next three years. The research showed that 50% of these businesses were more likely to seek finance, compared to 33% of other businesses.
Although only 2% more firms surveyed said they had switched banks in 2007 than in 2004 (up from 2% to 4%), a much higher proportion (17%) had considered a move. Just over a quarter would consider switching to another bank, if approached. However, two-thirds considered it unlikely that they would do so in the foreseeable future. Of the firms that did switch, 89% found the change to be extremely easy or easy. Bank charges were their biggest bugbear (40%). Other major issues included the banks poor service.
FPB member Geoff Rogers, of Geoffrey Rogers Chartered Accountants and Tax Consultants in Plymouth, called for more support for small firms suffering because of the credit crunch, including both finance and guidance.
"The Regional Development Agencies (RDAs) should earn their keep now and provide free support and coaching, financial aid, and cheap loans and grants for ailing businesses in order to prevent insolvency," said Mr Rogers. "It would save jobs and possible benefit payments, as well as ensuring the continuation of small businesses in the long term."
He added: "Spanish regional agencies have launched massive financial campaigns to prevent businesses becoming bankrupt, especially within the construction industry. If they can do it, why cant we?"
The FPB launched its Think Smallest First campaign in June 2008. Further information is available at: www.thinksmallestfirst.org.
To coincide with the launch of the Think Smallest First campaign, the FPB also unveiled its petition on the Downing Street website in June 2008: http://petitions.pm.gov.uk/Small-businesses/.
Broadcast media the Forum of Private Business now has ISDN capability and can provide comment, in quality audio, at short notice.
The FPB can also provide journalists with localised and sector-specific case studies.
The FPB is pleased to support the Childrens Cancer and Leukaemia Group (CCLG): www.fpb.org/charity
The FPB now has an online discussion forum, on which people can share information, join the latest debates affecting small businesses in the UK and vote in online polls. Visit the forum at www.fpb.org/forum.
About the Forum of Private Business
The Forum of Private Business (FPB) was formed in 1977 and fights on behalf of private businesses. The FPB represents approximately 25,000 UK-based businesses, which in turn employ in excess of 600,000 people.
The FPB also provides a range of business services aimed at increasing member efficiency and profitability.