Businesses may turn to inappropriate finance

Despite further signs of economic recovery, the latest information from the BDRC Finance Monitor for SME lending released last week highlights the Forum of Private Business's continuing concern that confidence in the banking industry remains an obstacle to supporting economic growth. Whilst figures for the third quarter show no change in the use of traditional banking products, with only 1 in 3 small businesses reporting use of these methods, the report indicates a continued rise in the use of credit cards from 15% in the fourth quarter of 2012 to 20% in the third quarter of this year. This is in contrast to overdraft use for the same period, which has decreased from 20% to 16% despite falls in associated costs. The findings could suggest that business owners are using credit cards as a short-term solution to cash flow issues and to sidestep overdraft charges. However, based on factors such as anecdotal evidence from members, the reduced cost of overdrafts and continued issues around late payment, this worryingly could indicate that an increasing number of struggling businesses are racking up an unsustainable amount of debt. While there is evidence that the banks have taken steps to resolve this through proactivity in pre-authorisation of overdrafts, this does not necessarily help those firms which are becoming increasingly reliant on credit cards for their short-term survival after five years of difficult economic conditions. Confidence levels also suggest that businesses continue to see the trading environment as extremely challenging. After the most positive business sentiment since its inception, with 51% of small firms looking to grow their businesses in the next 12 months, confidence has dropped to 47% with 36% of businesses reporting growth over the last 12 months compared to 44% in the previous quarter. The report also highlights a fall in the proportion of businesses injecting personal funds from 38% from 42% in the last quarter, as businesses have reverted to using their profits as opposed to personal assets or bank funding to finance future growth. Use of alternative methods of finance has also dropped marginally from a high point of 21% last quarter. Commenting on the report findings, Phil Orford MBE, chief executive of the Forum of Private Business, said: "This latest data further pinpoints the urgent need for the banks to convince the small business community that they are here to support businesses looking to grow and employ, which has not been helped by recent press coverage. Without clear support and positive action from the banks, this could remain a continuing obstacle and threat recovery in 2014. "When it comes to business finance, it is vital that banks take further steps to be more proactive in providing the liquidity businesses need rather than seeing further increases in the use of credit card finance," Orford concluded.