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Risky business: entrepreneurs forced to rely on flaky funding.

London, UK (16/02/2011)

A survey of SMEs has found that nearly half use credit cards or overdrafts to fund their business. Well, beggars can't be choosers...

It looks like the £76bn the banks have just pledged to lend to small firms this year as part of the Project Merlin agreement Ė thatís £10bn more than last year Ė may be arriving in the nick of time. Research among SMEs has found that business owners are frequently using credit cards and overdrafts to make ends meet. That may not sound terribly unusual to those of us who spend our lives semi-permanently in the red, with more credit card bills in our purse than is technically sensible. But when you're a small company, the cost of borrowing money this way can really take its toll...

On the plus side, the research (part of the bi-annual SME Trends Index compiled by broker Hilton Baird) does show that the UKís entrepreneurs are a resourceful bunch: with the banks generally reluctant to splash the cash of late, they're securing finance in any way they can. Half are apparently turning to bank overdrafts to fund their business, while 44% are hitting the plastic to ensure they can keep paying the bills. And in the circumstances, who can blame them?

However, this isn't a very sustainable approach to financing. No-one can be blamed for veering into the red from time-to-time, but itís not ideal when itís an ongoing arrangement - after all, money borrowed on a credit card attracts punitive rates of interest. The research doesnít give us any information about how long term this borrowing tends to be; if itís just to bridge a gap until late-payers (who are apparently getting worse) cough up, then thatís one thing. But if it's over an extended period, the debts can really mount up. Funding yourself on credit cards is a risky business, even for risk-friendly entrepreneurs.

So whatís the answer? Well, clearly to try and provide SMEs with more financing alternatives, so they can get their hands on their readies without having to dig into their overdraft. That £76bn pledged by the banks might help to some extent - but only if the banks actually stick to their promise, and only if they don't impose hugely expensive charges for the privilege of borrowing. Either way, it looks unlikely to solve the problem at a stroke. SMEs may have to keep getting creative for a while yet.
For more information please click here  http://www.managementtoday.co.uk/bulletin/mtenterpriseweekly/article/1054392/risky-business-entrepreneurs-forced-rely-flaky-funding/

 

 



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