Small businesses turning to risky loans

It seems the lack of bank lending is continuing to impact small businesses as new research claims that small business owners are resorting to personal loans to improve cash flow. A survey of 505 small and medium-sized enterprises by investment bank Close Brothers has found that 30 per cent would take out a personal loan to finance their business while six per cent said they would use credit cards to fund operations. Although credit cards have been a staple form of finance for entrepreneurs since before the credit crunch hit, the proportion of small business owners using them has increased by 50 per cent since last year. Furthermore, a fifth of those who responded also said they would approach friends and family for the funds, which is double the percentage recorded by the survey last year.

While small business owners need to pursue alternative forms of finance due to the difficulties in accessing credit from banks, the trend identified by this survey is worrying as the loans they are being forced to apply for are more risky, therefore potentially more hazardous in the long-term. Clearly, more support is required from the government and while the Department for Business, Innovation and Skills, which oversees the Enterprise Finance Guarantee scheme, claims more than 3,500 businesses have been offered loans, totaling more than £346m, this research highlights that there are more out there with cash flow issues.

Where gaining access to credit is still a major challenge for small businesses, good cash management can help them reducing the need to source additional funds. Best practices in financial management include being aware of how much money is being spent and identifying potential cash flow problems before they occur. Such management is not difficult to achieve either and simply requires having processes in place to monitor and track finances, as well as to prepare a cash flow forecast.

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