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Number of businesses taking on finance falls, despite Project Merlin

13 February 2012

The number of small businesses that have used a bank overdraft or loan has fallen in the past two years, according to a new member survey by the Federation of Small Businesses (FSB), even though Project Merlin was supposed to increase lending. Polling more than 11,000 FSB members, the survey found that only 35 per cent of members used an overdraft in 2011, 11 per cent a secured bank loan and seven per cent an unsecured bank loan. This is a drop of -8, -3 and -4 per cent respectively since 2009.

John Walker, National Chairman, Federation of Small Businesses

Published ahead of the full year figures on lending from Project Merlin (see the Bank's full year figures here) the survey also found that 33 per cent of respondents had used their own savings or inheritance to fund their business. In each of the previous three quarterly Project Merlin results, the banks missed their targets for lending to small businesses and so this trend looks set to continue.
 
The figures show that new businesses between 1-2 years old could still be finding it hard to access finance as 70 per cent used savings and inheritance to fund their business, 34 per cent got money from friends and family and only 25 per cent used a bank overdraft.

 
To help small businesses access the finance they need, the FSB is calling for more competition in the high street banking sector, but also better promotion of the alternative finance sources that are available to small and growing firms. 

 
John Walker, National Chairman, Federation of Small Businesses, said: "Our research in the last two years shows that around a third of businesses are refused credit and this could be reflected in the fact that newer businesses are using more of their own money to fund their business rather than turn to the banks for help. What we need to see is better promotion of the alternatives available and for the Government to put in place their bold credit easing plans, which will help small businesses access finance on better terms."

 
John Cridland, CBI Director-General, said: “For too long, the UK’s small and medium-sized companies have relied heavily on banks for most of their credit. If we do not act quickly to increase the range of available finance, other countries will steal a march on the UK.

“While banks will remain an important part of the funding landscape, growing firms also need ‘patient’ capital, with a longer investment return horizon. To deliver this, we need to give our firms access to new sources of funding, such as by opening UK bond markets to medium-sized businesses. The Government’s £1 billion of Business Finance Partnerships will also help stimulate investment in these companies.

“This is as much a problem of demand as supply. Firms need independent help and support to locate the finance that’s right for them. So we must cut through the red tape and complexity surrounding non-bank finance to make it more easily understood by small and mid-sized businesses, which often lack the resources of a larger company. We also need to make it simpler for alternative lenders to judge the credit worthiness of SMEs.”

To increase the amount of funding available for medium-sized businesses, the CBI recommends that the Government establishes a mid-sized bond market in the UK, using a mix of new infrastructure and tax incentives. Retail interest can then be stimulated in mid-sized businesses’ bonds through new tax-free savings in an ISA.

Short-term tax incentives, similar to Venture Capital Trusts, could be used to encourage investment in the new bonds, as well as exempting certain investments from tax.

Combatting a lack of awareness among SMEs about sources of non-bank finance will be vital to help stimulate demand, according to the CBI.

It proposes the existing programme of Independent Financial Advisers (IFAs), which serves consumers, is expanded to meet the needs of SMEs. It also calls on the Government to work with the financial services sector to help make non-bank finance, such as bonds and private placements, much less complex and bureaucratic.
 


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