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Where do contractor accountants find finance?

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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Image: Geneva – Jardin anglais – Binoculars by dibaer

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More business funding is needed, but where can we get it?

Vince Cable, the business secretary, says that banks are making it harder for small firms to apply for loans despite claims from the semi-nationalised banks that they approve at least 80% of loan applications.

Stephen Pegge, the chairman of the small business panel at the British Bankers’ Association, claims other business bank accounts are also matching this rate.

Mr Cable said these claims are misleading and cited proof from business industry bodies such as the Institute of Directors that shows that the banks are not meeting demand.

The IoD recently published research which found that around 33% of UK businesses had been refused banks loans. However, there has been some improvement as similar research conducted last year found that 57% of businesses were refused finance.

The BBA has also released figures showing that net lending by the banks was at an all time low in May. £500m was lent to SMEs but the banks collected more than that in repaid debts and withdrawn overdrafts.

A consultation is to be launched this week to discuss business finance and it will consider whether there would be any benefit to be gained by forcing new targets on the two semi-nationalised banks; RBS and Lloyds. Cable thinks that mandatory action forcing the two banks to make more finance available could be an attractive option.

However, the Labour government was unable to force Lloyds and RBS to meet lending targets to limited company contractors even though they were legally binding and a spokesman from the Treasury said that the coalition was still considering whether a new target based option would be effective.

The consultation will also look at other business financing alternatives. The coalition has already said that using equity finance could be one possible option. Currently only between 1 and 2% of SMEs use this option and the financial secretary to the Treasury, Mark Hoban, says that the majority of small businesses are missing an opportunity. To encourage more freelancers and SMEs to take up the option, Vince Cable also suggested recreating 3i, a private equity organisation which provided equity for small, expanding businesses.

© 2010 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: Seed Money by teamjenkins

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