Bank loans and overdrafts becoming less popular as SMEs turn to alternative finance sources

The Albion Growth Report – a study of 1,000 SMEs which aims to explore the factors that help businesses grow and the issues that hold them back – has found that the popularity of bank loans and business overdrafts is declining.

Instead, business owners appear to be turning to equity finance and other long-term financing options in place of the traditional bank sources.

SMEs report major improvement in access to finance

The report also finds that the number of SMEs that have secured finance to develop their businesses has soared to 44% this year, up from 27% in 2014. And that 44% of small and medium-sized firms applying for development finance over the past year were successful, up from 27% in 2014.

The third Albion Growth Report, also found that of those who secured finance, nearly a third (29%) of firms did so to invest in new equipment while a quarter (26%) used the money to develop new products and services. However, only one in ten (10%) had sought to raise finance to invest in R&D, a key driver of longer term success.

Popularity of bank loans and overdrafts falling

Bank loans and overdrafts have continued to fall in popularity, down to 49% this year from 76% in 2013.  However, the popularity of using third party equity or other long term finance has soared from 6% in 2013 to 34% in 2015 and one third of firms would consider raising external equity finance.

To find out more about these alternative finance options, read;

Despite the improvement, nearly one in five (18%) SMEs said they were affected by a lack of access to finance with the percentage rising to a third (32%) among medium-sized firms with a turnover of between £500k–£1m.

Younger business owners most likely to face funding problems

Younger entrepreneurs aged under 35 are the most likely to report difficulties in raising money (28%), almost double the number of business owners over 55 (15%). The findings also show that it is this same demographic that is most likely to embrace an equity culture.

Those sectors most willing to seek equity finance are manufacturing (43%) followed by IT/Telecoms (40%) while the construction industry has the lowest likelihood (19%).

Most popular reasons for raising funding

The top five reasons for looking for finance were:

  1. To develop the business – 44%
  2. To keep the business going (i.e. working finance) – 30%
  3. To invest in new equipment – 29%
  4. To invest in new products and/ or services – 24%
  5. To invest in technology – 17%

For more detailed findings, you can download a full pdf copy of The Albion Growth Report here.

Commenting on the report, Patrick Reeve, Managing Partner at Albion Ventures, said: “The UK economy continues to strengthen, providing excellent growth opportunities for UK businesses. Concerns about access to finance have given way to shortages in skilled staff and insufficient management expertise.

“It is a hugely optimistic climate, and we should be encouraged by the revelation that such a high percentage of firms are looking to raise finance to grow and innovate. There is also a clear trend toward non-bank lending such as the popularity of bank loans and overdrafts have continued to fall. What is particularly welcome is the emergence of the ‘Dragon’s Den generation’ – those under 35 who embrace an equity culture.”

More help on funding your business

You can find lots of help and tips on all aspects of business funding on ByteStart. Here are a few of our most popular financing guides;

And these will help you with your cash flow;

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