Not All SMEs Want to Borrow Money

Shiona Davies, BDRC ContinentalIntroducing the ‘Permanent non-borrowers’ (PNBs)

Much has been made of the various initiatives for encouraging more lending to SMEs by banks to boost the UK economy. Adding weight to the debate is the SME Finance Monitor, a quarterly study set up to provide robust, reliable, and neutral data on the issue from the SME’s perspective. With six waves already published, and the seventh due out in early March, the Monitor provides a wealth of insight into this key issue, such as the fact that not all SMEs use, or want to use, external finance.

This may come as a surprise to some. But analysis from the SME Finance Monitor has identified the ‘Permanent non-borrower’ (PNB), a group of SMEs who, based on their answers to the survey, seem firmly disinclined to use external finance. SMEs in this group are not currently using external finance, nor have they done in the past five years. They have had no borrowing ‘events’, have had no inclination to apply for finance and report no inclination to borrow in the three months following the interview.

Since the survey started in 2011, a consistent one third of respondents have met this definition (the equivalent of around 1.5 million SMEs). And whilst it is more common for the smallest SMEs to be ‘permanent non borrowers’, they can also be found amongst larger SMEs:

  • 37% of 0 employee businesses meet the PNB definition
  • 24% of those with 1-9 employees
  • 17% of those with 10-49 employees
  • 15% of those with 50-249 employees

Looking at PNBs by sector, we can see that they are more often found in the Health sector (where almost half, 46%, meet the definition) and are less likely to be found in the Transport or Wholesale/Retail sectors (where a quarter, 27%, meet the definition). There is very little difference by age of business, and relatively little difference by their external risk rating.

What else do we know about these SMEs? Well, it would be wrong to see them as unambitious or informal businesses. A third of them plan to grow, half have business plans and/or produce management accounts and a third have seen some innovation in the past few years. And whilst these percentages are all lower than for non-PNBs, the differences are not always dramatic (half of non-PNBs plan to grow, 59% have accounts or plans and 43% have been innovative).

Nor are there signs from this survey that their ‘non-borrowing’ stance is causing them financial problems. 5% reported having a credit issue (such as a bounced cheque or problems with trade credit) in the 12 months prior to interview, compared to 17% of non-PNBs. 14% said that they had felt ‘obliged’ to put personal funds into the business, again in the last 12 months – half the proportion of non-PNBs (32%).

From the data available to us, this group seems unlikely to be applying for finance in the near future and they show no signs of being unhappy with their position. Their identification has resulted in an increasing amount of data being presented in the full SME Finance Monitor report based not on all SMEs but on all excluding these permanent non-borrowers, as this provides a more realistic basis for assessing issues such as potential appetite for finance.

There are, of course, those SMEs that would have liked to apply for finance but did not do so for some reason. These ‘would-be seekers’, a smaller group of SMEs (around 10% of all SMEs, or 15% once the PNBs are excluded), will be the subject of a future article.

Shiona Davies is the Director of Financial and Business to Business Research at BDRC Continental, and author of the SME Finance Monitor

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