A new report by the Credit Management Research Centre and Taulia has revealed that UK companies have been relying heavily on trade credit.
It is also well known that traditional bank lending to SMEs declined by 20% in the last 12 months.
This is despite bank claims that they have plenty of cash to lend and a perception that they are declining loan applications. More realistically the decline in bank lending is down to loan criteria being tightened and the fact that credit worthy companies have been paying down loans instead of funding growth.
So how are small businesses going to fund the expected increase in business and orders that come with economic recovery from recession?
If a company accepts orders without being able to finance them it runs the risk of insolvency through overtrading, which is why so many commentators point out that most insolvencies occur during the upturn after a recession.
Given that many good businesses have used the recession to pay down debt, it can be assumed that their balance sheets have improved and therefore they will be easily able to raise finance for growth from the banks.
However there are a lot of SMEs that do not have a strong enough balance sheet to justify traditional funding. Where these sources are not available they are looking to fund growth using alternative sources of finance.
In the past such sources were myriad, such as from friends and family, negotiating deals with well funded suppliers, early payment terms from customers and even credit cards, but the banks remained dominant. Over the past 20 years asset based lending has grown since it can advance more funds than the banks due to the specific pledge nature of its security. More recently we are seeing a new route to finance from peer-to-peer and crowd funding websites.
The website based sources appear attractive and are often easier for obtaining funding but they can incorporate obligations such as a personal guarantee for the loan from the directors.
In April 2014 the FCA (Financial Conduct Authority) introduced new rules on loan-based (money loaned) and investment-based (share subscription) crowd funding that require the lenders to carry a certain amount of capital, to be open about defining the risks and to have resolution procedures in place in case of the lending platform failing.
It is likely that the online funding platforms will become stricter and require more information from borrowers before making a decision, but if used wisely they offer a great source of funding to growing SMEs.