SMEs are turning to high-risk forms of finance such as credit cards and loans from friends and family to keep their business on track, research finds.

The six-monthly SME Trends Index survey from commercial finance broker Hilton-Baird Financial Solutions finds that credit cards currently rank among the top two external sources of SME finance, with 42 per cent of respondents admitting to using them.

Bank overdrafts remain the most popular external funding option for SMEs, with 44 per cent using this method over the past six months.

Loans from family and friends are also used widely, with 20 per cent of business owners relying on the generosity of loved ones as a business lifeline.

A quarter of respondents (25 per cent) are currently using asset finance and even fewer are using invoice finance (21 per cent).

While 34 per cent of total respondents state that they expect January’s VAT increase to lead to further strain on their business’ cash flow, this figure was much higher amongst users of both credit cards and loans from friends and family (45 per cent).

Hilton-Baird managing director Evette Orams says, ‘Even though conditions remain tough, it is amazing how many SMEs are using forms of finance which carry with them huge risks to give them a quick fix cash injection.

‘Whilst it is understandable that owners or managers will feel more comfortable turning to friends and family they trust or indeed the familiarity of a credit card, these forms of funding don’t account for the long-term impact, which is often overlooked when dealing with the day-to-day realities and pressures.’