Small businesses are lacking imagination and rely on bank overdrafts or personal cash for additional funding when other options are available, according to research by information company Experian.
A survey of 300 SMEs looking at how and why they have sought additional finance revealed that information about alternative sources of finance are yet to make any significant impact on many directors.
Crowdfunding is the least well-known, with 69% of business leaders admitting they had no idea what the term meant or how a business could pitch for funds through a platform.
Angel investment from venture capitalists, business cash advances and government grants also scored poorly on business radar.
More than 40% of businesses agreed the first thing they do when thinking about additional financing is to approach their personal bank.
Accountants were the next stop for 18%, while few would shop around.
Cash flow problems
Just 10% would try the major banks first, 7% would search the internet for the best deals and 6% would speak to a broker.
However, 60% had sought some form of extra funding in the past 12 months and the short-term cash flow problems are the biggest reason for applying for extra cash (58%).
When asked to name the primary source of additional funding currently used, the top answer (20%), was delaying payments to their suppliers, further highlighting the desire to ease their cash flow. This was equalled by the 20% who said they rely on cash from family or friends.
Only 27% of SMEs will apply for some form of extra funding in the coming year.
Max Firth, UK Managing Director for Experian’s Business Information Services division, said: “When looking for finance, the first port of call for SMEs is their bank. However a commercial loan is unlikely to be appropriate for their specific needs, especially if the need is short term, such as alleviating cash flow issues.
Risky way to run a business
“For many SMEs, it may make more sense to consider invoice finance options to alleviate the stress of collecting payments, especially where large new deals are won and they are already dealing with increased outgoings to ensure delivery of an order.
“It’s clear that SMEs are struggling to get paid themselves and this suggests that getting new customers on board is outweighing the need to assess the credit ratings and payment performance of prospective customers before doing business with them. This is a risky way to operate. It is vital that SMEs are completely aware of how quickly clients pay their bills to other suppliers and any likely impact on their own business.
“By delaying their own payment to other firms, they are storing up further difficulties for themselves in the future. A poor payment history could eventually affect their credit rating, their attractiveness to customers and their ability to negotiate good deals with suppliers.”