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SMEs stuck in a cash flow crisis

26 October 2012

SMEs in the UK are increasingly turning to alternative forms of finance in a bid to avoid failure. Cash flow problems have led to an increase in credit cards and personal savings being used to continue operations.

The International Trade Monitor (ITM) revealed that a lack of confidence in credit availability has led to more than one fifth of SMEs looking at alternate sources. The top three sources of funding being considered are: Asset-based finance (44 per cent), factoring account receivables (31 per cent) and personal savings (26 per cent).

Of those looking outside of banks for financing 20 per cent said they had considered using credit cards. One in ten indicated they had actually done so.

Gareth Heald, UK finance director at Western Business Solutions, said, "The fact that businesses are increasingly turning away from banks and dipping into their own personal savings- and credit cards- is a real worry."

On top of this, research conducted by ABN AMRO Commercial Finance found that most SMEs would survive less than three months without overdrafts. Despite this many are seeing their overdraft limits reduced and fees increased.

Almost 90 per cent of respondents admit that their business would only last three months if access to an overdraft were removed. Most commonly it was used to cover 'cash flow gaps'.

Almost three quarters (71 per cent) of those questioned have seen their overdraft limit reduced, while 86 per cent have seen overdraft fees rise.

Peter Ewan, managing director at ABN AMRO Commercial Finance, said "SMEs are clearly relying more and more on their overdrafts as a cash flow stopgap during tough times. But this practice could become dangerous if banks are unable to ensure funding is consistent."

As a result the confidence of SMEs has fallen. Between July and September only 46 per cent of SMEs were confident about the current UK economic climate. This is down from 51 per cent when compared to the previous quarter.

Importers and exporters were particularly concerned about the instability in the eurozone with 61 per cent saying it was a major concern.

The ITM did show some green shoots of positivity with many SMEs planning to increase trade with emerging markets. This has become a necessity for many as the eurozone continues to contract.

Mr Heald added, "[This] suggests SMEs are not sitting on their hands waiting for things to improve, they are creating their own markets."

The research highlights how tight margins can be for SMEs and receiving late payments or suffering bad debt could be the final straw for a small firm. Conducting credit checks and keeping an eye on customers can help businesses prevent this. Graydon UK offers international credit reports as well as UK ones.

This entry was written by Ranjna, posted on 26 October 2012 Bookmark the permalink. Follow any comments here with the RSS feed for this post. You can post a comment.

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