Small businesses drawing on personal cash reserves, KPMG finds

Tuesday 4 February 2014

When starting a limited company, securing the finance needed is integral to get operations off the ground.

However, research from KPMG suggests more and more entrepreneurs are choosing to bankroll themselves rather than seeking outside help from banks and lending institutions.

A survey of small to medium-sized enterprises (SMEs) revealed only a third are looking for external funds to support their growth plans. Indeed, nearly half intend to spend their own money.

According to KPMG, 46 per cent of businesses plan to use their own cash reserves, while 21 per cent aim to raise funds outside of the business.

Nevertheless, 75 per cent of SMEs are now more confident about their prospects than in the previous 12 months, with a fifth setting their sights on international expansion.

Iain Moffatt, head of regions at KPMG, said: "Nearly half of businesses are not willing to take on any risk associated with external finance and leverage their business, despite the reported optimism levels.

"This is an indication that companies are still very uncertain about the banking market, which some view as being unsupportive to small businesses during the recession."

Mr Moffatt added that while confidence is improving, SMEs still have their doubts about the economy. In fact, two-thirds claim economic conditions will affect their growth the most.

"If the economy doesn’t do as well as predicted or interest rates go up too early, the risk of potential insolvency will be heightened if the majority of businesses intend to fund growth from their own resources," he said.

When asked how businesses measure growth, 32 per cent of respondents said an increase in revenue is the key. However, KPMG claim this could lead to overtrading as the economy improves, as there is a tendency for companies to take on more work than cash resources can manage.

Mr Moffatt stressed that while there is cause to be confident, over the coming years success will depend on keeping control of cash, accurately forecasting cash-flow and monitoring the cost base.

However, access to external finance could prove to be a barrier for some firms. Indeed, the Public Accounts Committee (PAC) recently criticised existing government programmes, claiming there isn't enough coherence.

What's more, figures show that the net lending of banks participating in the Funding for Lending scheme fell by £2.3 million since the programme was launched.

The number and value of loans backed by Enterprise Finance Guarantee scheme also declined each year between 2010 and 2013.

According to the PAC, this is evidence that the government is failing to properly manage initiatives.

Margaret Hodge, chairman of the PAC, explained: "Departments manage their various schemes not as a coherent programme but simply as a series of ad hoc initiatives.

"There is no common understanding about which parts of the SME sector are generating the most growth and where government support would do most good."

Consequently, it is difficult for departments to demonstrate they are achieving the best value for money.

The PAC believes the establishment of the British Business Bank is a chance for the government to align its various SME initiatives. With £1 billion capital at its disposal, the bank will become a source of finance to businesses.

However, to ensure coherence, it will be important to define what needs to be achieved, and how each scheme and programme will contribute to the overall objective.

By Victoria McDonnell

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