More SMEs seek alternative finance than a bank overdraft, but should more be borrowing?

Evidence of the increase in demand of alternative finance from small businesses just keeps growing.

The latest findings from our Business Monitor research series shows that more small businesses in need of funding sought alternative finance rather than a bank overdraft in the last 12 months. And, only marginally more sought a bank loan.

The survey of 1,000 small businesses found that, while 70 per cent hadn’t applied for funding because they didn’t need it, 30 per cent of those that did, applied to an alternative funding provider. This compared to 18 per cent that applied for a bank overdraft and 31 per cent for a bank loan. Just 15 per cent applied for a business credit card.

This is shows that bank funding is losing its significance amongst small businesses as they become more aware of the range of non-bank funding models available to them.

Whilst this is all good news, it remains that 70 per cent of the businesses we spoke to hadn’t sought funding in the last 12 months because they didn’t need it. This concurs with other research too. The latest BDRC Continental SME Finance Monitor, covering the first three months of this year, showed that 48% of small businesses were classed as permanent non-borrowers (PNBs) – an increase of 8% on the previous quarter. PNBs are businesses that have not used external finance in five years and have no plans to take on debt in the future.

Whilst it’s laudable they’re managing to avoid borrowing, it raises concerns that they are being too cautious. Of course, it’s hardly surprising given the pain and uncertainty caused by the recession, but not borrowing suggests that opportunities for growth and greater success are being overlooked. On top of which, the BDRC report also showed that 72% of SMEs with current debt aim to pay it down and remain debt free.

As a sector, we must continue improve knowledge and understanding of funding options and the added value that the sector offers of transparency, ease, expedience and choice. More importantly perhaps, we need to build on the trust that I like to think we’ve developed as a sector.

Public distrust of the traditional financial services sector has never been higher and we’ve benefited from being new and unsullied, transparent and entrepreneurial, developing and delivering services for SMEs by SMEs. It’s this which will give small businesses the confidence to borrow again.