Small firms are finding it increasingly costly to raise new finance, according to the latest research from the Federation of Small Businesses (FSB). The findings were announced ahead of a Bank of England (BoE) decision to raise interest rates to 0.75%
Four in ten (42%) small firms describe new credit as ‘unaffordable’ in Q3 2018, with less than a quarter (24%) saying the opposite. Less than a third (31%) are being offered interest rates of under 4%, down considerably from the four in ten (39%) recorded in Q3 2017. One in three (35%) are being offered interest rates of 7% or more on new lines of credit in Q3 2018, up from 24% at this time last year.
The research shows only 13% of small firms making applications for new finance in Q3 2018. Though a good proportion (38%) of these businesses are still applying for bank loans, increasing numbers are also seeking asset-based finance (30%) and approaching crowdfunding (16%) and peer-to-peer (9%) platforms.
Wider analysis shows that half of small firms are ‘permanent non-borrowers’, with almost three quarters saying they would rather grow their business more slowly than borrow to enable faster growth.
FSB National Chairman Mike Cherry, said “A lot of small firms will have been preparing for higher interest rates from today. However, with borrowing costs for small firms already high, it’s critical that any future rate rises are carefully considered and gradual. A good proportion of small businesses will welcome the prospect of higher rates taking some heat out of price increases. Consumer inflation has been consistently above 2% for months now with input costs, especially fuel, also on the rise.
“This inflationary pressure has proved a challenge for small firms, not least retailers who are already up against high employment costs and spiralling business rates. One big concern is the impact of rising rates on consumer demand. For the first time in 30 years, we have an environment where household outgoings are bigger than household incomes.”
“Even a slight increase in consumer credit and mortgage costs is going to have a significant impact on the ability of shoppers, including small business owners, to spend on our struggling high streets. We need to see a fundamental shift in the UK’s small business finance culture. Too many firms are reluctant to borrow and realise their full growth potential. Those that do are too reliant on traditional debt products.”
“We could learn a thing or two from the US where equity finance is booming. UK firms need to be encouraged to recognise that this kind of investment can bring not only growth finance, but also advice and support from those with real expertise.”