SME Access To Finance Survey: 2019

4. Use of finance

Summary

• Different sources place different estimates on SMEs' use of external finance. The SME Finance Monitor suggests 39 per cent of SMEs in Scotland were using external finance in 2018 while the Small Business Survey indicates that 39 per cent for SMEs without employees and 68 per cent for SMEs with employees used finance in 2019. Both demonstrate that use of finance increased with business size.
• The proportion of SMEs using external finance has declined since 2012, indicating firms were preferring to rely on their own internally generated resources. This is perhaps a legacy of the 2007-08 recession.
• Credit cards and overdrafts continued to be the most common forms of external finance used by SMEs.
• Only six per cent of SME exporters were using export credit insurance at the time of the survey and four in ten did not know what it was, indicating a need to improve awareness of the existence and benefits of export credit insurance.
• The reasons SMEs used finance varied by finance type. Overdrafts, leasing/HP and asset based finance were mostly used to help with cash flow while loans and grants were most used to buy fixed assets / premises. Credit cards were mostly used for purchasing raw materials and expenses.
• RBS and Bank of Scotland continued to dominate the SME banking market in Scotland and rates of switching between banks remained low.
• Most SMEs tended to use their main bank as a provider for most forms of finance, indicating a reluctance amongst SMEs to consider different sources of types of providers.

This chapter examines the use of external finance by Scottish SMEs at the time the survey was undertaken. It provides an overview of the proportion of SMEs that were using external finance, and how this and their net borrowing has changed over time. It examines the types of finance SMEs used and the reasons for using finance.

4.1 Proportion of SMEs using external finance^[38]

Different sources place different estimates on the use of external finance amongst SMEs in Scotland. The SME Finance Monitor suggests 39 per cent of SMEs in Scotland were using external finance in 2018 while the Small Business Survey indicates the proportions stood at 39 per cent for SMEs without employees and 68 per cent for SMEs with employees in 2019.

SMEs' use of external finance increased with business size. The proportion of SMEs using finance has declined since 2012.

This section examines the proportion of SMEs that use external finance. The SME Access to Finance Survey results do not reflect the overall SME population's use of finance due to the oversampling of SMEs that sought finance (see methodology section for more details). To estimate the proportion of SMEs currently using finance, this section therefore draws on external sources: the BVA BDRC SME Finance Monitor and the UK Government Longitudinal Small Business Survey. The BVA BDRC SME Finance Monitor data relates to 2018 whereas data from this SME Access to Finance Survey relates to the period November 2019 - January 2020.

SME Finance Monitor

The SME Finance Monitor categorises SMEs in three groupings in terms of their use of external finance: those that are using finance; those that are not using external finance but have done so in the recent past; and those who are not using finance and have not done so in the recent past. Data from the 2018 SME Finance Monitor shows that:

• 39 per cent of SMEs in Scotland were using at least one form of external finance at the time of the 2018 survey, a slightly proportion than in the UK as a whole (36 per cent).
• 5 per cent had used finance in the five years prior to the survey were not at the time of the survey, again a slightly higher proportion than the UK as a whole (5 per cent)
• 56 per cent had not used finance at all in the five years prior to the survey, a lower proportion that in the UK as a whole (61 per cent).

The proportion of SMEs in Scotland using finance has declined over time from 43 per cent in 2012 to 37 per cent in 2014 and has been broadly stable at 39 per cent in recent years (2017 and 2018).^[39]

The Monitor does not provide data by business size band for Scotland however data for the UK shows that finance use increased with business size from 34 per cent of those without employees to 77 per cent of medium-sized businesses.

Base: : All SMEs; UK n=18,002 and Scotland n=1520
Source: BVA BRDC SME Finance Monitor

Small Business Survey

Data from the Small Business Survey suggests a higher proportion of SMEs in Scotland were using finance compared to the SME Finance Monitor. The survey estimates that 68 per cent of SMEs with employees in Scotland were using finance at the time of the 2019 survey (higher than the proportion in the UK as a whole at 63 per cent) while 39 per cent of SMEs without employees were using finance (lower than the proportion in the UK as a whole at 46 per cent).^[40] The proportion of SMEs with employees using finance has been broadly stable since 2016 while the proportion of SMEs without employees using finance decreased from 62 per cent in 2018.^[41]

The inclusion of zero employee businesses in the SME Finance Monitor findings explains part of the difference in findings between the two sources, as zero employee businesses dominate the sample and are much less likely to use finance.

4.2 Net borrowing position

The net borrowing position of most SMEs had remained broadly stable over both the 12 months and three years prior to the survey. However, a lower proportion of SMEs increased their net borrowing over the 12 months prior to the survey than over the three years prior, indicating that SMEs may have been relying more on their own reserves than taking on new debt.

Whereas the previous section considered SMEs use of external finance at a static point in time, this section considers how their net borrowing position (level of borrowing less repayments) had changed over recent years. This section and all other sections of this chapter based on findings of the SME Access to Finance Survey.

The survey asked SMEs about how their net borrowing had changed over the three years and the 12 months prior to the survey (Figure 2). The majority of SMEs reported that their net borrowing position had remained unchanged over both periods, indicating that levels of borrowing amongst those business using finance has remained broadly stable. However, a lower percentage of SMEs increased their net borrowing over the 12 months prior to the survey than over the past three years, indicating that SMEs may have been choosing to rely more on their own reserves than taken on new debt more recently.

Base: All SMEs. n=1003 - minimum SMEs in business for one year or more, 947

4.3 Types of finance facilities used

Whereas the previous sections looked as SMEs use of finance overall, this section considers the different types of finance facilities that SMEs were using at the time of the survey. It also considers SME exporters' use and understanding of export credit insurance and SMEs' use of personal current accounts.

The most common types of external finance used were business credit/charge cards and overdrafts.

Of those businesses who said they were currently using external finance, the most common forms of finance used were business credit/charge cards and overdrafts (Figure 3). This is in-line with 2012, when the survey was last undertaken. Less than one per cent of businesses were using crowd funding (including peer-to-peer lending) and only 2 per cent were using equity finance.

Base: SMEs currently using finance, 2012 n=947; 2019 n=925
Multiple answers allowed across this question.

Export credit insurance

Only six per cent of SME exporters were using export credit insurance at the time of the survey and four in ten did not know what it was, indicating a need to improve awareness of the existence and benefits of export credit insurance

SME exporters^[42] were asked a number of questions about export credit insurance, which protects exporters against the risk of non-payment by foreign buyers. Only six per cent of SME exporters were using export credit insurance at the time of the survey, broadly in line with the proportion in 2012 (10 per cent).^[43] A further 2 per cent had used it in the past but were not at the time of the survey. Over half (51 per cent) of SME exporters surveyed said they had not used export credit insurance in the past year and a further 39 per cent said that they did not know what export credit insurance was^[44] (Figure 4). This points to a potential need to improve SME exporters' awareness of the existence and benefits of export credit insurance.

Base: all SMEs who export overseas, n=261

SMEs with experience of export credit insurance (those either using it at the time of the survey or those who had used it in the past),^[45] were asked a number of follow-up questions about their perceptions of the ease of accessing and cost of export credit insurance. Given the very low sample size (21 businesses had experience of export credit insurance), the results must be viewed with a significant degree of caution.

• In terms of ease of access of obtaining export credit insurance, around four in ten (42 per cent) felt it was just as easy to obtain relative to previous years and around four in ten (36 per cent) felt it had become harder to obtain. No SMEs reported that it had become easier to obtain.^[46]
• In terms of the perceived cost of export credit insurance, around four in ten (37 per cent) felt the cost was around the same as in prior years whilst around a quarter (27 per cent) felt it had become more expensive. No SMEs felt it had become less expensive.^[47]

Current accounts

Only a small minority of SMEs used a personal account for business purposes

Of those SMEs that held a current account,^[48] the majority (94 per cent) had a business current account as their main account while 6 per cent had a personal current account.

Of those businesses that used their personal current account for their business (just 16 SMEs in the sample), almost half did so because they did not have enough business transactions to warrant a separate business account.

4.4 Reasons for using finance

The reasons SMEs used finance varied by finance type. Overdrafts, leasing/HP and asset based finance were mostly used to help with cash flow / working capital while loans and grants were primarily used to buy fixed assets / premises. Credit cards were mainly used for purchasing raw materials and expenses.

The previous section considered the extent to which SMEs used the different types of finance facilities available. This section outlines the reasons SMEs use each facility. The top three reasons cited by SMEs for using each type of finance are shown.

• Overdrafts: to help with cash flow (63 per cent of SMEs using overdrafts); working capital (14 per cent); for backup/safety net/just in case (13 per cent).
• Commercial loans/mortgages or unsecured loans: premises (33 per cent of SMEs using commercial loans/mortgages or unsecured loans); working capital (12 per cent); equipment/machinery (12 per cent).
• Leasing/hire purchase: to ease pressure on cash flow (69 per cent of SMEs using leasing/hire purchase); other benefits such as maintenance and replacement of faulty assets (9 per cent); didn't have enough/any security to get a loan to buy the asset (6 per cent).^[49]
• Asset based finance: to generate working capital (77 per cent of SMEs using asset based finance).^[50]
• Personal credit cards for business purposes:^[51] purchase of raw materials or other supplies (32 per cent of SMEs using personal credit cards for business purposes); travel and subsistence (28 per cent); buying equipment/ vehicles (24 per cent).
• Grant funding from public bodies: to buy fixed assets (equipment/ machinery etc.) (29 per cent of SMEs using grant funding); to buy other assets (19 per cent); research and development for new products/services (18 per cent) and introduce new or innovative products/services (18 per cent).
• Loans from family, friends or the owners, directors or shareholders of the business: because they offered the best terms/rates (32 per cent of SMEs using loans from family, friends or owners, directors or shareholders of the business); more flexibility (25 per cent); know who I'm dealing with (13 per cent); and banks or other financial institutions would not lend at all / insufficient security (10 per cent).

4.5 Further detail on types of finance used

The previous sections have considered the extent to which and reasons why SMEs use the different forms of finance available. This section examines trends in SMEs' use of each finance type in more detail. The figures presented are as a percentage of the SMEs using each finance facility.

Overdrafts

Of those businesses who had an overdraft facility at the time of the survey:^[52]

• The most common size of overdraft facility was in the range £10,000-£49,999, cited by 41 per cent of businesses using an overdraft
• Almost of half (45 per cent) used their overdraft facility every month
• The majority (86 per cent) kept their limit the same over the past year. 8 per cent increased their limit and 6 per cent decreased it
• The majority (94 per cent) did not exceed their limit in the past 12 months

Deposit accounts

Of those SMEs that were using a deposit account at the time of the survey:^[53]

• The most common amounts held in deposit accounts were in the range £10,000-£49,999 (24 per cent), followed by less than £5,000 (18 per cent)
• 30 per cent increased the amount held in deposit accounts in the last year, 18 per cent decreased the amount held and 51 per cent kept it the same.

Commercial loans/mortgages or unsecured loans

Of those businesses that were using commercial loans/mortgages or unsecured loans at the time of the survey:^[54]

• The most common loan size (when the loan was originally taken out) was in the range £100,000-£499,999 (34 per cent), followed by £10,000-£49,999 (26 per cent)
• The majority (95 per cent) never failed to make repayments when due over the last year
• Over half (52 per cent) kept their level of loan/mortgage borrowing the same over the past year while almost four in ten (38 per cent) decreased it.

Businesses currently using an overdraft and/or commercial loan or mortgage^[55] were asked what type of security, if any, they provided. A third (34 per cent) provided no security while around a fifth provided a personal security (21 per cent) or charge of the business property (17 per cent). 13 per cent provided charge over their main or family home.

Personal credit cards used for business purposes

Of those businesses that were using personal credit cards for business purposes at the time of the survey:^[56]

• Around half charged less than £250 per month of business expenses to their personal credit card
• The majority (84 per cent) paid off in full each month the business expenses charged to personal credit cards

Business credit cards

Of those businesses that were using business credit cards at the time of the survey:^[57]

• The most common amount charged each month was less than £250, cited by 28 per cent
• The majority (83 per cent) paid off in full each month the business expenses charged to business credit cards.

Grants from public bodies

Of those businesses who were using grants from public bodies at the time of the survey:^[58]

• More than half (57 per cent) received grant funding from the Scottish Government. 18 per cent received grant funding from Scottish Enterprise and nine per cent from the European Union.^[59]
• The most common amounts of grant funding received were up to £5,000 (32 per cent of businesses that received grants) and £5,001-£25,000 and £25,001-£100,000, each cited by around a quarter of businesses.
• In terms of the reasons businesses sought grants, no businesses reported that it was because they could (or thought they could not) get any funding from banks or other financial institutions. Only one per cent each sought grant funding because they could not get all the funding they needed from banks or other financial institutions or because other sources of finance were too expensive or risky. The most commonly reported reason for using grant finance (cited by 44 per cent of those receiving grants) was because it was available or the business was entitled to it. The next most common reason was because they preferred to use a free form of finance (17 per cent).^[60] This suggests that, at least for those surveyed, businesses were not seeking grants due to any failure of the commercial market to provide finance.

Equity finance

Only 13 of the 673 limited liability SMEs surveyed were using equity finance at the time of the survey and therefore the results below must be viewed with significant caution.

Of those limited liability SMEs that were using equity finance at the time of the survey, the most common sources of equity finance were business angel groups/syndicates and the Scottish Investment Bank (Scottish Enterprise), each cited by around a third of limited liability SMEs that were using equity finance. Most of the limited liability SMEs that were using equity finance raised £1 million or more from equity finance, cited by over three quarters of limited liability SMEs that were using equity finance.

Of those limited liability SMEs who had not applied for equity finance in the past three years and were not using it at the time of the survey,^[61] the most commonly cited reason for not applying for equity finance were: did not need finance for the business (48 per cent); do not want to give up control of the business (44 per cent); do not need it as have finance from other sources (38 per cent); do not think it's suitable for the business (34 per cent).

Of all limited liability SMEs surveyed,^[62] around one in ten (11 per cent) were planning to apply for equity finance in the next three years whilst the vast majority (85 per cent) were not.^[63]

4.6 Main provider of finance

RBS and Bank of Scotland continued to dominate the SME banking market and rates of switching between banks remained low

To gain an understanding of the concentration of the SME banking market, SMEs were asked which bank/financial institution their business primarily used (the institution with which they did the most business) and the extent to which they used other providers alongside their main bank/financial institution.

Figure 5 shows the main bank or financial institution that SMEs were using for the business in 2019. Almost two thirds of SMEs surveyed were either using Royal Bank of Scotland (39 per cent) or Bank of Scotland (24 per cent) as their main bank.^[64] This was a slight increase in market concentration from 2012 when 58 per cent of SMEs cited the two banks.

Base: all SMEs, 2012 n=1011; 2019 n=1003

Most SMEs tend to use their main bank as a provider for most forms of finance, indicating a reluctance amongst SMEs to consider different sources or types of providers.

SMEs were asked if their main bank was a provider, one of the providers or not a provider of each form of finance they currently used (Figure 6). Unsurprisingly, SMEs' main bank was the only provider of external finance for the majority of SMEs using overdrafts, business credit/charge cards and deposit accounts. In contrast, SMEs' main bank was the only provider for around half of SMEs using loans.

Base: SMEs using some form of finance, 980 - Base minimum: Asset based financing, 74