The findings from the Federation of Small Businesses (FSB) quarterly small business index (SBI) also reveal that of those who apply for finance, only 43% of those applications are approved, which is also at a record low.
Only 19% of the index’s 1,200 respondents described the availability of credit as ‘good’ which is the lowest seen since 2016, with 44% of successful applicants being offered a borrowing rate of up to 4% in Q1 which is down 32 percentage points on the same period last year.
Of the SMEs that did manage to secure finance, four in ten, 42%, planned on using the credit to manage cash flow, this is double the number, 21%, that plans to use the funds to update their equipment, over double, 19% that plans to use it for an expansion and ten times as many, 4%, who will use it for recruitment.
The research also found that 61% of SMEs were impacted by late payment of invoices over Q1, and a quarter noted that the tendency for late payment is rising with one in 10 SMEs having experienced late payment for the first time in Q1 of this year with the same number planning to downsize this year.
Of those that applied for finance, 61% sought the traditional overdraft or loan products, and 25% applied for asset-based finance. However, there has been a slight rise of those, although still small, seeking funds through peer-to-peer platforms or crowdfunding with 12% choosing this route.
Based on the results, the FSB has accused lenders of ‘pulling up the drawbridge’ on small businesses and warns that doing so will only ‘further stifle economic growth’ going forward.
The group also highlighted the latest Bank of England (BoE) figures which showed that the annual growth rate of lending to SMEs was at a record low, despite small businesses making net debt repayments of close to £1bn in March alone.
The FSB backs up their claims by highlighting that the lending to big corporates, by contrast, has ‘increased significantly since the start of the year’.
Martin McTague, national chair, FSB said: ‘Lenders pulling up the drawbridge for small firms will threaten our already faltering economic recovery. Businesses are born every day across the UK, and many need funding to get off the ground, ensuring they reach a stage where they’re profitable and creating opportunities.
‘A big chunk of what little finance is being accessed is being used to manage cash flow challenges as our late payment crisis worsens, rather than for much-needed investment and innovation.’
‘A lot of those who’ve worked tirelessly to adapt, survive, and thrive over lockdowns need finance too, empowering them to take their firms to the next level, driving our economic recovery and the transition to net zero in the process.’
The FSB further calls for a culture change within the lending industry stating that banks need to take an ‘objective approach’ to small business finance and big corporates by putting best supply chain practices at the heart of environmental, social, and governance (ESG) programmes.
The business group also calls on the government to accelerate the delivery of the FSB’s proposal to make audit committees directly responsible for supply chain practice to address the ‘worrying trend’.
McTague concluded: ‘The result would be win-win: strength in corporate supply chains and a thriving small business community driving economic growth from the ground up.’
