Small and medium sized businesses are increasingly turning to credit cards, and asking family and friends for loans, to keep their firm afloat.

Hilton-Baird Financial Solutions conducts an SME Trends Index survey every six months and its latest research shows that 42% of respondents admitted to using credit cards to bolster their company finances.

Bank overdrafts are still the most popular way of obtaining external finance, with 44% of SMEs using this option in the last six months, whilst 20% asked family and friends for a loan to tide them over.

Asset finance was the option of choice of 25% of the survey’s respondents, and maybe surprisingly only 21% used invoice finance.

Just over a third of all respondents said January’s VAT increase will put a further strain on their cash flow, but this jumped to 45% of those who use credit cards and loans from people close to them.

Evette Orams, the MD of Hilton-Baird, said it was amazing to discover so many SMEs using high risk means of finance in order to get a quick injection of cash. People don’t look to the long-term impact of turning to family and friends or using credit cards.

Meanwhile, it appears that the high street banks are still falling short of their Project Merlin lending targets. In the first quarter, the banks should have lent £19 billion but they fell well short of that at only £16.8 billion. Early indications show that they will have lent around £37 billion in the first half year, compared to a £38 billion target.

Lloyds Banking Group has said they will beat their agreed targets and Barclays and Santander seem to be on course to meet theirs. But HSBC and RBS are failing to meet their commitments on small business lending.

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Sage published research findings last week showing that 76% of SMEs have no knowledge of the proposed alterations to PAYE Real Time Information.

Since PAYE was introduced in 1944, very few changes have been made to the system. Under Real Time Information, employers and online accountants will need to give HMRC information for National Insurance, PAYE and Student Loans each time they run a payroll, rather than at the Payroll Year End. If companies understand the way this will impact their operations, they will be able to minimise the impact by preparing in advance.

There are various different payroll providers in the UK and they offer different products and levels of support. It is not mandatory for providers to include the new changes within their software so the onus is on business owners to ensure they have the correct procedures in place.

Neilson Watts, from Sage’s Small Business Division, has advised small business owners to contact their payroll provider if they are unsure how the changes will affect them.

A lot of people have expressed concern as to whether HMRC is ready to implement such a large change after the disastrous logjam last year when the department migrated PAYE records to a new system. However, the National Audit Office says the Revenue has made significant progress towards improving its administration of PAYE.

HMRC still has a lot of work to do if it is to complete stabilisation by 2013 but this work is key to the introduction of RTI. Once RTI is in place, there will be an increase in the number of in-year amendments to PAYE records and this could lead to further data quality challenges.

The report also said that HMRC must define its PAYE operating model, explain how it will transform it to fit the RTO environment and test its implementation plans.

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A new report claims that the UK’s financial sector is not doing enough to support SMEs and this is damaging the economy.

Will Hutton, The Work Foundation’s executive vice chair, has submitted the report to the Independent Banking Commission, and says that despite bank assets growing to four times GDP, lending to corporates represents only 5% of all lending.

The report goes on to say that the lack of support for SMEs has discouraged borrowers from applying for loans. This lack of investment reduces innovation levels, which in turn creates a cycle of less dynamism, less investment and less innovation.

The authors of the report want to see rigorous ring-fencing, or separation, of commercial and retail banking operations from investment banking, as well as additional capital being made available. By doing this, internal frameworks would be changed and the financial sector would find it more attractive to lend to smaller firms.

Furthermore, the banks must stop concentrating on balance sheets and start to look on small businesses as positive investments which will strengthen the economic recovery.

The FSB also agrees that lending to small businesses must improve. The banks say small businesses are not applying for credit and yet a recent survey from the FSB shows that around 960,000 of its members asked the banks for a loan in the past 12 months and a third were refused. 16% of those refused were not told why their application was turned down.

34% of those who applied needed the funding to cover cash-flow, but 21% wanted finance to buy new machinery and equipment and a further 17% wanted to expand their business.

John Walker, the FSB’s national chairman, pointed out that the OBR forecasts that business investment will help to drive the recovery but this cannot happen until banks work with companies to make sure they get much needed finance.

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Contractor accountants may be interested to learn that Vince Cable, the business secretary, has once again called on the UK’s high street banks to increase lending to small businesses.

Under the terms of the recently signed Project Merlin agreement, the UK’s major banks must lend £19 billion to small businesses each quarter. However, in the last three monthly period, only £16.8 billion was lent to small firms and this led to Cable saying the banks must put more effort into small business lending.

He went on to say that if the banks don’t stick to their agreement, the government may rescind its promise and change its tax regime, which currently favours the banking sector.

Small businesses who fail to get loans from the major banks may want to consider approaching the Metro Bank.

The newest high street banking player said that business banking managers are available to 43% of larger organisations, but only 16% of micro SMEs. The bank also points out that 29% of larger firms are likely to be accepted for a loan compared to just 2% of micro firms.

The managing director of business and commercial banking at Metro Bank, Mark Price, said it was clear that the banks are letting down small businesses. He went on to stress that all businesses, irrespective of size, are welcomed at Metro Bank.

Price also explained that the Bank focuses on local community based banking which means lending decisions are made by local managers who understand the relationship individual businesses have with the Bank.

Metro Bank recently opened its eighth branch and within the next ten years it hopes to have more than 200 branches in Greater London.

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Owners of small businesses, contractors and freelancers should have in-depth knowledge of their own sector before approaching banks for investment funds, advises the British Bankers Association.

The BBA claims that SMEs will have a better chance of getting a loan if they are prepared to answer a barrage of questions about their respective industry.

Angela Knight, the BBA’s chief executive, said that it is imperative that you understand your market; what it looks like, is it a growth market? Is it vibrant? How large is your customer base?

Business owners should also compile a realistic set of forecasts showing costs and projected income. These numbers should be discussed with the bank to make sure they look right and are presented correctly.

In the financial year ending April 2010, total business angel investment activity dropped to £60.5 million, a decrease of 3.7% on the previous year, according to the Annual Report on Business Angel Activity in the UK.

Entrepreneurs have found it increasingly difficult to obtain funding for new start-ups. As a result, owners started exploring angel funding whereby wealthy individuals provide private equity and get shares in the business in return.

However, business angels were also affected by the recession and they had less money to invest in new ventures. The ARBAA report also showed that there were 4,555 registered business angels in the UK between 2009 and 2010, but only 37% of them were active and less than 10% made any investment during the period.

Despite the drop in activity, Mark Prisk, the business and enterprise minister, said the study shows the important role business angels have to play in financing new businesses. He went on to say he hoped businesses will continue to look to angels when they need business expertise and guidance as well as funding.

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The Institute of Directors has criticised the coalition for failing to reduce the burden of tax on small businesses. Tax – the Weighty Burden, the annual report from the Institute, calculates that the true burden of taxation for SMEs is between 32% and 43%.

This burden is unlikely to reduce even when corporation tax rates decrease in 2014 because employers have to pay additional fuel duty, national insurance and business rates.

The head of taxation at the IoD, Richard Baron, said the burden of taxation is weighing growth down. Although it is not possible to make radical cuts at the moment, the government should already be making plans to reduce the heavy burden of business taxation.

Baron believes corporation tax needs to be lower than originally planned and employers’ NICs should also be reduced.

However, a recent report from the TUC suggests that cutting corporation tax further would have an adverse effect on the economy and job creation.

George Osborne believes that reducing the rate of corporation tax will entice companies to set up in the UK, which will help drive the recovery in the private sector. But Brendan Barber, the TUC chief, says this argument does not stand up.

The rate of corporation tax in the UK is already amongst the lowest in Europe. The OECD average is 26.5%, but in excess of 90% of small businesses in the UK pay 20% and the average for large organisations is 23.2%.

Barber said that we have extremely competitive corporation tax rates already. He went on to point out that some people, including Osborne, have been talking about emulating the aggressive low tax policies of Ireland, but the current economic problems there suggest that this is not a sensible option.

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New research has estimated that 7% of SMEs deliberately evade tax and more than one in three small enterprises would willingly understate profits if they believed they would not get caught.

HMRC is about to launch a new assault on small businesses it believes are evading taxes. The Revenue believes that small enterprises are responsible for the around 50% of the annual tax gap – the difference between what it collects and what it thinks it should collect.

HMRC’s research shows that around 35% of the 4.8 million small businesses in the UK are “attitudinally non-compliant”. These firms are likely to take a casual attitude towards record keeping and believe that tax evasion was acceptable. The study also discovered that out of every five firms that are tempted to break the rules, one would actually do so.

However, small businesses could well be concerned if HMRC inspectors are working on the assumption that a large number of taxpayers want to cheat.

The Revenue on the other hand says its compliance policy aims to encourage taxpayers to get it right. The director-general of business tax, Melanie Dawes, pointed out that 93% of SMEs are not evading tax and the department wants to support honest firms by reducing administrative burdens.

The most common forms of evasion amongst SMEs include failure to record some transactions in the books and not deducting NICs and tax from employees’ pay.

Inspectors are due to start visiting small companies in the second half of this year to check their records. Fines will be levied on firms with significant record-keeping failures.

HMRC is also going to crack down on companies that should be VAT registered, but aren’t. The current threshold for VAT registration is £71,000.

The government earmarked £900 million to help HMRC crack down on tax avoidance and evasion and more than half of this money is being targeted at the small business sector.

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Following the news last week that the big banks could miss the SME lending targets agree by Project Merlin, the Forum of Private Businesses called for better competition, local bank managers to have lending powers and more investment in regional branches.

The chief executive of the FPB, Phil Orford, said the Forum wants banks to invest and regional services and give local bank managers the power to make lending decisions as they are best placed to understand individual local companies, which could include accountants for contractors. The current over-centralised, tick box mentality must go, he added.

The Project Merlin banks released a joint statement claiming that demand for small business funding has declined. However, the latest survey of small businesses from the Department of Business, Innovation and Skills discovered that over a quarter of SMEs looked for finance last year and just over half of them had difficulties getting funding from the first institution they went to.

Orford went on to say that regardless of the banks’ comments, there is still a pressing need for affordable funding. The main problem is that mainstream lenders are increasingly alienating small businesses. The big banks dominate and this has led to a lack of competition. Although there are a few innovative funding platforms, they are struggling to break into the market.

HSBC has said it is willing to welcome firms with viable propositions. In fact HSBC’s head of small business banking, Huw Morgan, said the bank would like to see more companies asking for funding.

He went on to say that businesses are now feeling more positive about their ability to grow. A lot of firms are scrutinising their customer base to see how they can expand by entering new markets and offering more.

Morgan finished off by saying that the bank will fund firms that have done their research and have a clear business strategy.

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A recent survey by Inuit shows that 69% of small businesses are put off recruiting new staff because of the burden of PAYE.

The software provider discovered that nearly 50% of employers did not realise that their end of year returns had to be filed by the 19th of May and 28% said they did not expect to meet the deadline.

Mark Linton, the founder of The Business Growth Show, said one of the major challenges facing small business owners is not the actual process of recruiting new staff, but what to do once they’re onboard.

PAYE for small businesses is a nightmare. “How do I pay staff?”, “Is government legislation getting in the way?” And “am I doing it right?” are all questions that worry small business owners, he explained.

In previous years, there was a seven-day grace period for people who missed the deadline but now that year-end returns have to be filed online, this has been removed. Employers who did not submit on time face a penalty charge of £100 per 50 employees for every month, or part month, that the return is overdue.

SMEs are also worried about the compliance checks HMRC is about to implement. Penalties of up to £3,000 could be imposed on businesses that have not kept accurate employee records.

Meanwhile, another survey, this time from the Clydesdale and Yorkshire banking group, has found that 10% of small business owners have been late making VAT payments and 19% have missed out on grants or tax breaks.

Whilst 15% of small business owners are bamboozled by new regulations, 16% said they did not know who to turn to for advice on business legislation. Gary Lumby from the banks said it was a matter of concern that SMEs did not know how to get help and the banks hope to remedy that situation for their clients.

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Accountants for contractors might want to know that UK graduates think they will receive better pay and career progression opportunities if they work for a corporation rather than an SME, according to Give A Grad A Go, an SME graduate recruiter.

Whilst 91% of graduates think salaries are better in corporations, 92% thought SMEs encouraged more creativity and at 62%, they also scored better on work-life balance.

The managing director of Give A Grad A Go, Cary Curtis, said graduates often do not realise that opportunities are available in SMEs and therefore smaller employers can struggle to source the best talent.

Graduates have been having a hard time trying to find a job over the last three years. According to Thames Ditton – SHL, 60% of people who graduated within the last three years have not been able to secure a graduate position. The class of 2010 has suffered most from the lack of graduate opportunities. Only 34% have secured a graduate position.

The survey also found that over 400,000 graduates would not have attended university if the fees were £9,000 per year. Nearly three quarters of the graduates surveyed said they would consider moving overseas to find a job and 36% of them cited better salaries as their main driver.

All the graduates who took part in the Thames Ditton – SHL survey said they would undertake unpaid work in order to get experience and 39% would be prepared to do this for more than three months if it would help them get a job.

Graduates could be losing out by not using social media in their job hunting efforts. Despite its growing popularity, only 39% of graduates would use it to market themselves to potential employers. Only 5% of graduates apply for roles through LinkedIn and yet 34% of recruiters use it to screen candidates.

Sean Howard, the vice president of business solutions at SHL, said he was amazed that graduates were not using social media in their job hunting efforts. He also believes recruiters may need to think again about their hiring criteria if the government doesn’t reconsider university tuition fees.

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The UK government has pledged to reduce red tape and yet its latest proposals to change parental leave and flexible working will increase bureaucracy, according to the FSB.

The Federation of Small Businesses has expressed its concern that the coalition’s plans to introduce changes to parental leave and extend flexible working will damage small businesses.

Although the FSB has been calling for reform of the parental leave regulations, the government’s proposed solution of allowing parents to take chunks of leave, instead of one block, would make it far more complicated to administer.

The government has launched a consultation on the proposals and the FSB will be contributing by expressing the opinion of small businesses.

The FSB’s national chairman, John Walker, said that despite promising to ease the burden of red tape, the government plans to introduce additional complexity which will make things even more time confusing and complicated for small businesses.

It will be extremely onerous for small firms and limited company contractors to organise workloads and cover for an employee who decides to take parental leave in chunks rather than a continuous block of time. The majority of small businesses already allow flexible working and the FSB urges the government not to make it mandatory for employers to consider requests for flexible working after a 26 week qualifying period as it would pile yet more red tape on them.

David Cameron wants the private sector to drive the economic recovery but changes to these regulations could further deter small businesses from hiring more staff, Walker concluded.

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Accountants for contractors and other small business owners might be interested to hear that Lord Oakeshott has accused the banks of treating them unfairly.

The former Lib Dem Treasury spokesman pointed out that there are large discrepancies between the interest rates charged on loans to large organisations and those levied on small businesses. Figures from the Bank of England show that big firms pay an average rate of 1.78% on a £20 million loan and yet a smaller loan of £1 million would attract a rate of around 3.69%.

Lord Oakeshott would like to see the government put immediate pressure on the banks to rectify this situation and show that it is serious about helping small businesses lead the economic recovery.

One bank that it trying to do its bit is Spanish based Santander. Last week, the bank announced that it had secured £150 million from the European Investment Bank so that it can provide loans at discounted rates to firms with less than 250 employees. Funds are available immediately for companies requiring a loan of up to 12.5 million Euros over a minimum period of two years.

Santander has already pledged to increase lending to SMEs by 25% this year. The bank is increasing overall lending by £6.7 billion and £4 billion has been set aside for small and medium sized enterprises.

115,000 SMEs in Europe benefited from funding from the EIB last year and 30 billion Euros have been lent to European SMEs over the last three years, of which 2 billion Euros went to small businesses in the UK.

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