Small businesses using loans to manage cashflow, instead of investing

One in four small businesses borrow money for cashflow after late payments almost doubled to £23bn last year

Small businesses are mostly taking out loans to manage their cashflow rather than investing in their companies, according to research.

Almost 40 per cent of small businesses that borrowed money in the last quarter of 2019 used cash to keep going rather than invest in their firms, says the Federation of Small Businesses.

This compared with 23 per cent using finance to update equipment, 16 per cent to expand their business or just 2 per cent for hiring staff.

>See also: Small businesses spend hour and a half each day chasing late payments

That small business is using external finance to cover outstanding invoices highlights the late payment crisis, says the FSB. The latest figures from Pay.UK show that the balance of outstanding late payments almost doubled to £23bn in 2019.

And applications for external finance dropped off in Q4 as the share of firms describing credit as “unaffordable” rose, despite more being offered at sub 4 per cent lending rates.

Mike Cherry, national chairman of FSB, said: “It’s troubling that so many external finance applications are driven by cashflow concerns. You wouldn’t dream of doing your weekly shop and telling the cashier that you’ll pay for it in a hundred days, but corporations take this approach to small businesses in droves.

“The uncertainties facing big businesses over the past few years will have no doubt increased the temptation to use small firms as free credit lines.”

>See also: SMEs say late payments are a greater issue than they were a year ago

Business in the West Midlands were the most likely to seek finance, with close to one in four (24 per cent) making an application. Those in Scotland (13 per cent), the North East (6 per cent) and North West (5 per cent) were far less likely to do so.

Cherry added: “You have a substantial share of successful small firms who could be growing more quickly if they accessed external finance but are reluctant to do so. The general perception is that borrowing is expensive – even when that’s not the case a good deal of the time – is also a persistent challenge.”

Further reading on cashflow

How to tackle late payments to your small business


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Tim Adler

Tim Adler is group editor of Small Business, Growth Business and Information Age. He is a former commissioning editor at the Daily Telegraph, who has written for the Financial Times, The Times and the...

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