Personal Funds Also Supporting SMEs

Shiona Davies, Director of Financial and Business to Business Research at BDRC Continental, and author of the SME Finance MonitorThe SME Finance Monitor reports on more than just loan and overdraft applications, it also looks at the broader financial context for SMEs. One aspect of this is the blurring between business and personal funds, particularly at the smaller end of the market.

54% of all SMEs have some personal element to their business arrangements, ranging from 59% of those with 0 employees to 15% of those with 50-249 employees. This net figure includes using a personal bank account for business banking, having, or applying in your personal name for a loan or overdraft facility for the business, or reporting an injection of personal funds into the business in the previous 12 months.

While 12% of SMEs have a facility they use for the business that is in a personal name, and 18% use a personal account for their business banking, it is the injection of personal funds that makes up most of the personal element in the business.

Of businesses interviewed in Q1 2013, 19% said that they had chosen to inject funds into the business to help it develop and grow, while a further 21% said that they had felt forced to inject personal funds. This leaves 60% of businesses saying that the business had not received an injection of funds in the past 12 months, and these figures have changed very little since the question was first asked in Q2 2012.

Smaller, younger businesses were more likely to have seen personal funds put in, as were those with a worse than average external risk rating. For the year ending Q1 2013:

  • 67% of Startups had invested funds (34% chose to, 33% felt forced to), compared to 28% of businesses trading for 15 years or more (8% chose to, 20% felt forced to)
  • 44% of 0 employee businesses had invested funds (19% chose to, 25% felt forced to), compared to 12% of those with 50-249 employees (6% chose to, 6% felt forced to)
  • 50% of those with a worse than average risk rating had seen funds invested (22% chose to, 28% felt forced to), compared to 20%of those with a minimal risk rating (8% chose to, 12% felt forced to).

These injections of funds were a mix of long (40%) and short term investments (32%), with 28% saying it was a mix. Six out of 10 of these injections were for £5,000 or less, especially if they were to businesses with fewer than 10 employees, or put in as a short term investment. This means that the equivalent of 11% of all SMEs had seen an injection of £5,000 or less as a short term investment, while at the other end of the scale, 6% of all SMEs had seen an injection of more than £5,000 as a long term investment.

An obvious question is the relationship between these injections of personal funds and bank lending. Analysis shows that funds were injected into businesses that use external finance and also those that don’t. Eight out of 10 of those who chose to put funds in also met the definition of a “Happy non-seeker” of finance (who had not applied for a loan or overdraft and said that nothing had stopped them), suggesting they were happy with their decision to use personal rather than bank funds. By comparison, half of those who had felt forced to put funds in were “Happy non seekers”. 17% met the definition of a “would-be seeker of finance” (who wanted to apply but said that something stopped them) and 29% had experienced a borrowing event, so there are some possible indications here that personal funds might be substituting for bank finance.

To explore this hypothesis further, additional questions have been asked in the SME Finance Monitor questionnaire for Q2 2013 specifically to explore the extent to which a cash injection was made because of a decline from a bank for a facility, or indeed the fear of a decline, and this data will be included in the Q2 report, due out at the end of August.

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

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