Nearly half of all SMEs are missing out on growth opportunities because of a reluctance to borrow, research suggests.
A report, carried out by BDRC Continental, found that, despite the numbers of small businesses utilising external finance, 54% of the SMEs continue to avoid it. The trend follows years of research indicating that attitudes towards borrowing remain one of concern. Even on the topic of emergency lending as a response to the COVID-19 pandemic, bank bosses reported SMEs would be reluctant to borrow. It appears that although SMEs know that they need a cash injection to take their business to the next level – or just to survive, there is a nagging doubt about turning to external funders.
However, external finance plays a vital role in the lives of many enterprises. Done correctly, it can help you to expand your business and achieve your ambitions, as well as ensure the longevity of your company and help you to overcome any hurdles.
So why is there a reluctance to borrow? And what factors are preventing small businesses from seeking the funding they need to grow?
In this blog, we have detailed why SMEs aren’t borrowing as much as they should – and why lending should be seen as a critical support tool for your operations and business goals.
- Why are businesses reluctant to borrow?
- How does lending help businesses and the economy?
- What to consider before borrowing
Why are businesses reluctant to borrow?
There are many reasons why businesses may be fearful when it comes to taking out a loan.
Whilst previously a failure of banks in offering loans to small businesses has been seen as problematic, this is not necessarily still the case. There is now an abundance of lenders and lending options out there. This suggests the issue lay in the mentality of business owners and entrepreneurs themselves, and possibly a lack of awareness of the different options open to them.
One of the main reasons, BDRC Continental research has found, is a belief that external funding results in a loss of independence (47%). And, if you are considering equity as your funding route of choice, then this may well be true. However, with so many other types of funding available, it doesn’t always have to be about a loss of independence or control.
Undeniably, borrowing can be a burden. In the same survey, over 40% felt that seeking external funding caused too many worries and 37% said it was too risky in the current economic climate – and the threat of COVID-19 and subsequent recession will only fuel these fears. However, when you consider that the majority of businesses believe that they have a good understanding of the finance options available to them and their confidence in ultimately securing the finance is high, it would seem the reluctance is more down to a ‘fear of failure’ than their lack of investment readiness.
The survey shows that, in general, SMEs understand that securing finance can support their development plans, with 27% of borrowing SMEs placing external funding as a key reason for their business growth. In fact, over a fifth of those that have borrowed recently even admitted that, without external funding, they would not be in operation today.
Factors like Brexit and economic and political uncertainty may also be contributing elements to a reluctance to borrow.
Whatever the reasons against borrowing may be, we are in danger of becoming a risk-averse nation. Convincing small businesses to secure finance when they need it the most is the biggest challenge we need to overcome.
How does lending help businesses and the economy?
The reality is that few businesses will be able to achieve growth without utilising some form of external finance. Expansion moves are costly, and even the most successful companies will be unlikely to have the money laying in their accounts ready to be used. So, a loan or equity fills the funding gap between your finances and the growth goals you want to accomplish.
Moreover, in times of unprecedented crisis and financial hardship, lending may be a lifeline for firms. While it is essential to be careful not to spiral into worse debt as a result of borrowing more than you can afford, taking out a loan could allow you to overcome obstacles and help your business to survive. If we take the COVID-19 pandemic as an example, where many firms were forced to close and saw income dry up, lending to companies from banks has increased fivefold as emergency loans, and other schemes are utilised – showing just how essential lending is during challenging times.
The significant role that external finance takes in both ensuring the survival and growth of businesses mean entrepreneurs must be encouraged to apply for finance where it suits their needs and situation. However, it also aids the economy in a general sense, which is good news for everyone.
By allowing businesses to expand and overcome barriers, the risks of bankruptcy and foreclosure are reduced. Further, smart use of funding may result in increased profit and revenue, which then can be pumped back into the economy via increased expenditure, employment and so on.
Lenders also benefit from interest gained from loans, to be reinvested elsewhere. So, generally speaking, borrowing helps to keep the entire economy moving, as well as boosting the results for companies.
What to consider before borrowing
While external finance boasts powerful potential efforts, firms need to undertake thorough research before committing to any kind of loan. By doing so, they will be able to feel comfortable and confident in their decision, helping to assuage some of the fears that surround borrowing, as well as ensuring their success.
Below, we have listed the considerations you should make.
- Understand what your borrowing need is. A loan you take out to grow your business may differ from one you take out to overcome a funding gap, but knowing the reasons why you wish to use external finance will help you to find the best solution. Ask questions like whether you want short or long-term finance and any other requirements you need to address in any loan you seek.
- Know how much you need to borrow and check it’s affordable. You should aim to find a loan that addresses your requirements and prevents you from having to take out multiple loans (which may harm your credit score and end up costing you more in interest). You should also make sure that you will be able to afford the repayments on any loan you take out without pushing yourself to the limit, as to avoid debt snowballing and worsening your situation.
- Watch out for the pitfalls. The best way to put your mind at ease is educating yourself on the common funding traps that many businesses fall into by not preparing adequately. Take time to review these and ensure you are not in danger of any of them.
- Consider different sources. In the modern lending market, there are more providers of loans than ever. From traditional banks to alternative lenders, you should consider the various routes and compare loans against one another to find the best deal.
- Prepare for the application process. Another element that may scare businesses away from external finance is the fear of being rejected by their bank or other lender. However, understanding the application needs and what documentation you need to submit will enable you to undergo the process with ease and guarantee your success.
Seek support
If you are still uncertain or fearful of external finance, it is crucial to speak to an independent advisor to discuss the issues and determine the role that funding should play in your operations.
At Pegasus Funding, our team is on hand to take you through how borrowing may assist the unique challenges your business is facing, as well as help you to find solutions that will ensure success.