‘Managing Cashflows’ Cited as Top Reason for Borrowing Among Small Firms

Managing cashflow was cited most often as the motivation behind efforts to access credit among small companies in the last quarter of 2019.

That’s one of the findings of recent research carried out by the Federation of Small Businesses (FSB), which discovered that almost 40 per cent of successful external finance applications made by small firms late last year were primarily about managing cashflows and balancing the books.

Less than a quarter of the company bosses quizzed by the FSB recently said they accessed external funding so they could invest in updating their equipment and only 16 per cent said they wanted a cash injection to expand their operations in the coming months.

“It’s troubling that so many external finance applications are driven by cashflow concerns. This really shouldn’t be the case,” said the FSB’s national chairman Mike Cherry in a statement.

According to the FSB, a major reason why so many small firms are struggling to maintain their cashflows without the use of credit is that they are so routinely paid late by larger scale clients.

Indeed, the organisation says that its own previous research indicates that roughly 50,000 small companies close every year as a direct result of what it calls the UK’s “late payment crisis”.

Those closures are estimated to cost the British economy in the region of £2.5 billion annually, with the balance of late payments believed to have increased sharply over the course of 2019.

“If this government wants to leave a lasting legacy among small businesses, it has to make ending the UK’s late payment crisis a top priority,” said Mr Cherry.

“The uncertainties facing big businesses over the past few years will have no doubt increased the temptation to use small firms as free credit lines. We need to put that attitude to bed, for good.”

Mr Cherry went on to say that many small businesses aren’t using credit in situations where they could benefit from doing so in part because they worry more than they need to about the potential expenses and charges involved.

Meanwhile, mainstream lenders and traditional banks generally remain relatively cautious about lending to small businesses applying to them for loans or overdrafts.