Are the banks supporting SMEs?

Whenever there’s news of banks providing finance to businesses – especially to SMEs, we’d like to believe they are doing everything they can to support businesses and help rebuild Britain.

But are they? Do they support small and medium enterprises struggling from the recent recession? It causes concern when we have government ministers accusing banks such as RBS of causing businesses harm by removing or rescheduling debts, working against the best interests of their customers.

Family funding

According to a recent survey by Experian, over a third of the 600 respondents used the bank of “Home & Family” to fund their businesses. It’s so hard to borrow money that SME directors are using their own homes to mortgage and invest in their business. Another regular source is personal credit cards or dipping into their savings.

Are banks supporting businesses? These statistics seem to say otherwise. Of those surveyed:

• 65% of directors have drawn funds directly from the family bank account.
• Directors from 48% of businesses have drawn funds or used personal credit cards.
• Investments over £10,000 are funded by mortgaging family homes.

What do they need the money for?

Of those surveyed, 48% used the money as set-up costs. 37% said they used it on equipment or premises. 30% of the funds were used to pay off suppliers’ bills and 26% to clear off debts.

Risk of personal liability

The research shows directors have become more resourceful when applying themselves to their financial needs. However, the use of personal funds should only be done after careful consideration. Pouring money into an enterprise may not always be the answer. If there is an underlying problem within the business that has not been identified and addressed, this may simply be “throwing good money after bad”. So, using personal finances would not help the business and may leave the director personally liable for the debts. As well as the business failing, the director may end up with serious financial problems – which also means more creditors could go unpaid.

Take the necessary action

If you manage a business which needs additional funding, especially to discharge historical debts, then you should carefully consider what you do. Your best bet would be to seek professional advice to review your business as it may be insolvent.

Perhaps investments aren’t what is needed; you may need to downsize and reduce your staff, resources and costs. Maybe because of changed circumstances your business can now only afford to repay a portion of its debt. As a better alternative to simply shutting down a limited company (better for staff, better for creditors, and better for you), a Company Voluntary Arrangement (CVA) may be the right solution. Or if you operate as a sole trader, an Individual Voluntary Arrangement (IVA).

In summary

We’d like to think that banks are doing their utmost to support SMEs. However, the results of a recent survey tell a different story. Business owners are frequently dipping into family funds, personal finances, and even credit cards to stay operational. Using personal funds to support a business is a very risky move; if the business is struggling, pumping in more funds may not be the answer, and risks making you personally liable for the debt.

If your business is struggling, you should take the necessary action to save it. That action could be a formal monthly repayment plan or more drastic restructuring if necessary. For free, impartial advice tailored to your circumstances and with no obligation, speak to one of our advisors today.