Small firms use own savings due to lack of bank credit

The FSB wants banks to offer more affordable and flexible credit

Small companies have turned to their own resources for funding as they have found it hard to get affordable credit from banks, according to new research.

A survey by the Federation of Small Businesses in Scotland found more than a fifth of firm bosses had dug into own their savings over the past year.

Only a third had used a bank overdraft to finance their business.

The FSB said small Scottish firms needed access to affordable, flexible credit from banks.

The annual Small Business Survey of more than 1,200 firms was carried out by FSB during September and October.

It found that 25% of companies had used retained profits to finance their business.

About a tenth of those surveyed relied on a company or personal credit card or a bank loan, and nearly half did not borrow from any of these sources during the year to last October.

Nearly a third of businesses said there had been changes to the interest rates charged on bank facilities, and only one in six said charges had decreased.

The cupboard marked 'emergency' is bare and, if the issue of bank lending is not resolved urgently, businesses will not have the working capital to take advantage of the recovery Andy Willox FSB

This was at a time when Bank of England base rate fell to its lowest ever level, and stayed there.

Some 43% said cash flow was a major obstacle to achieving business objectives, and 23% cited problems with obtaining affordable finance.

The annual survey found 47% of firms saw their profitability decrease in their most recent annual figures, while 30% saw profits grow. Sales volume was up for 31%, and down for 45%.

The research showed 44% of the smaller private firms look to public sector contracts for work, at a time when cuts are looming.

That included 31% supplying goods and services to local councils, 22% to schools, colleges and universities, while 13% contracted to the National Health Service.

Fair lending

Asked about their future plans, 47% said their plan through the worst of the recession was to retain their size, while 32% thought they could expand by up to a fifth.

Asked what would help business prospects, the most popular measure was retention of VAT at 15%.

It returned to 17.5% at the end of the year, after the survey was carried out.

This was followed by maintenance of low interest rates, fair bank lending and taxation issues.

The survey also found the Scottish government among the better payers of bills.

Around a quarter of firms taking part in the survey and working with the public sector reported slow payment by councils and the health service, and even higher rates of delay from agencies, quangoes and the private sector.

Andy Willox, policy convener of the FSB in Scotland, said: "While the picture painted is of Scottish firms relatively optimistic about the future, many businesses have used up their cash reserves.

"The cupboard marked 'emergency' is bare and, if the issue of bank lending is not resolved urgently, businesses will not have the working capital to take advantage of the recovery - making any upturn more fragile and sluggish than need be.

He added: "Scottish firms looking to take on staff, to make improvements to their premises, to expand and grow the Scottish economy must be able to get access to affordable, flexible finance.

"Further, the two banks which control the Scottish small business banking sector need to reach out to the small business community and rebuild the trust which has taken a hit in the last 18 months."