SME Access To Finance Survey: 2019

6. Attitudes to using external finance and reasons SMEs do not seek finance

Summary

• The survey results indicate there is a reluctance amongst SMEs to use external finance.
• The majority of SMEs who did not seek finance said they did not need finance. Only a minority did not apply because they thought they would be turned down and this proportion had fallen over time.
• Two thirds of SMEs that did not seek finance were completely self-funded and the majority said they were unlikely to use finance in the following year.
• Half of all SMEs surveyed said they were happy in theory to use external finance to help grow their business, however 8 in 10 said their current plans were based entirely on what they could generate and fund themselves. Three quarters said they would accept a slower growth rate that they could fund themselves rather than borrowing to grow faster.

Section 5.1 drew on external sources to demonstrate that the majority of SMEs do not seek finance in any given year and that the proportion of non-borrowers has increased over time. This section uses findings from the SME Access to Finance Survey to look in more detail at SMEs that did not seek finance to determine the reasons why and their previous and likely future use of external finance. It also draws on a number of new questions that were added to the 2019 survey to gain a better understanding of the attitudes of all SMEs surveyed (not just those that did not seek finance) in using external finance, providing results for key sub-groups of interest.

6.1 Reasons for not seeking finance

The majority of SMEs who did not seek finance said they did not need finance.

A minority did not apply because they thought they would be turned down and this proportion had fallen over time.

Of those SMEs who had not applied for new finance or refinanced over the 12 months prior to the survey, the vast majority (85 per cent) said they had not sought finance because the business had not needed to borrow, broadly in line with 2012 at 82 per cent (Figure 12). Five per cent were 'indirectly discouraged' from borrowing, reporting that they did not apply because they thought they would be turned down. The proportion of businesses that were indirectly discouraged fell from eight per cent in 2012.

Base: SMEs who had not refinanced or applied for new lending in 12 months prior to the survey, 2012 n=532; 2019 n=631

6.2 Previous and likely future use of finance amongst non-seekers of finance

Two thirds of SMEs that did not seek finance were completely self-funded and the majority said they were unlikely to use finance in the following year.

The previous section considered the reasons why SMEs who had not sought external finance did so. This section considers whether these SMEs had used finance in the past or are likely to use it in the future to give an indication of their attitudes to using finance over this wider time frame.

Of those SMEs that did not refinance or apply for new finance in the 12 months prior to the survey:

• most (63 per cent) said their business was completely self-funded whilst around a third (31 per cent) said they had used external finance for the business in the past
• the vast majority (85 per cent) said they were unlikely to use external finance in the 12 months following the survey with only 14 per cent said they were likely to.

6.3 Attitudes to using external finance

Half of all SMEs surveyed said they were happy in theory to use external finance to help grow their business, however 8 in 10 said their current plans were based entirely on what they could fund themselves. Three quarters said they would accept a slower growth rate that they could fund themselves rather than borrowing to grow faster, indicating there is a significant reluctance amongst SMEs to use external finance.

The previous two sections examined the subset of SMEs that had not sought finance over the 12 months prior to the survey to examine the reasons for not seeking finance and their past and likely future use of finance. This section draws on a number of new questions that were added to the 2019 survey to gain a better understanding of the attitudes of all SMEs surveyed (not just those that did not seek finance) in using external finance. The results are presented for SMEs as a whole and also, where possible, for key sub-groups of interest including size band, sector, business type (high growth/exporter/new start) and location (urban/rural).

Base: All SMEs, 1003 (Micro n=494; Small n=387, Medium n=122)

Half (49 per cent) of SMEs said they were happy to use external finance to help the business grow and develop (Table 2). Willingness to use finance appeared to increase with employee size-band, with small and medium-sized businesses more willing than SMEs as a whole to use external finance. In terms of business types, high growth firms (70 per cent) and new starts (64 per cent) were more willing than average to use external finance to grow and develop the business.^[72] In terms of the sectors, firms in the construction sector (36 per cent) were less happy than average to use external finance.^[73] The results by location (urban/rural) were in line with the all-firm average.

8 in 10 (82 per cent) SMEs said their current plans were based entirely on what they could afford to fund themselves. Small firms were less likely than average to say this. Looking at the findings by sector, firms in the construction sector (91 per cent) were more likely than average to say their current plans are based on what they can fund themselves while firms in the business services sector (75 per cent) were less likely than average to say this.^[74] The findings by business type and location were all in line with the all-firm average.

Three quarters (76 per cent) of SMEs said they would accept a slower growth rate that they could fund themselves rather than borrowing to grow faster. Small and medium-sized firms were less likely to be willing to accept a slower growth rate rather than borrow. Construction firms (87 per cent) were more likely to accept a slower growth rate than borrow while business services firms (67 per cent) were less likely than average to do so.^[75] The findings by business type and location were all in line with the all-firm average.