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SMEs running on reserves

15 December 2013

SMEs running on reserves

Small and medium-sized enterprises (SMEs) are reliant on cash reserves to fund their growth, according to new research. Challenger bank Aldermore has revealed that 38% of businesses are depending on cash that has been set aside in reserve to see them through the recession and to finance growth. The research, which was conducted among 300 UK SMEs, found that of the remainder, 12% said they will turn to a bank loan, while 10% plan to use leasing or hire purchase.

Damon Walford, managing director of Aldermore Invoice Finance, said: "Given the continuing reluctance of big banks to lend to small businesses, it's understandable that business owners have been forced to rely on their cash reserves to fund their future growth. "But as cash reserves become depleted, so business owners will need to consider alternative forms of funding, such as invoice finance and asset finance."

Of those surveyed, 9% of businesses will rely on a bank overdraft for access to finance, while 7% said they will use factoring and invoice discounting. But 8% of business owners are set to use their own money and another 10% are not planning to fund future growth at the moment. Aldermore said the findings supported data released by International Trade Monitor, which showed that a lack of confidence among SMEs had seen more than one fifth of businesses consider alternative sources of funding, with the top three sources identified as asset based finance, factoring and personal savings.

Research by accountancy firm Baker Tilly also found that businesses continue to suffer from cash flow issues. The Baker Tilly SME Distress Monitor, which aggregates the latest accounts filed by businesses across the UK with sales of between £5m and £25m, with results drawn from around 25,000 SMEs, revealed that 24% had insufficient funds to pay their short-term debts. The study showed that of the companies surveyed, 21% reported a fall in pre-tax profits of 50% or more, down slightly on the previous year when 24% of SMEs confirmed a decline.

Bruce Mackay, restructuring and recovery partner at Baker Tilly, expressed his concern at the number of firms struggling to pay short-term debt. He said: "Previous recessions have shown that businesses risk failing due to cash flow constraints as the economy starts to recover. "This is mostly down to businesses overtrading, and I fear we may see more businesses going under if they aren't able to manage their working capital needs effectively."

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