SMEs reluctant to borrow

High growth small and medium-sized enterprises (SMEs) are reluctant to seek finance from banks to fund growth, a study by the Institute of Chartered Accountants of Scotland (ICAS) has found.

The study found that high growth SMEs are "highly reluctant borrowers" because of their lack of trust in banks. Many firms also said they were unwilling to sacrifice their autonomy in order to access bank finance.

The study also found that high growth SMEs:

  • are 9% more likely to seek bank finance than other SMEs but are no more or less likely to receive it
  • prefer bank finance to equity finance
  • are likely to use a ‘mixed cocktail' of finance, including internal resources and debt.

The report, Funding issues confronting high growth SMEs in the UK, was launched to study the demand for finance among high growth SMEs and investigate the problems they encountered.

It focuses specifically on high growth SMEs because of their capacity for growth and employment.

Dr Ross Brown and Dr Neil Lee, who conducted the research on behalf of ICAS, have made a number of recommendations for increasing liquidity to SMEs:

  • target policies towards high growth SMEs and focus on long-term finance
  • consider how the demand for finance could be improved
  • the Department for Business, Innovation and Skills should conduct surveys that focus on 'reluctant borrowers' and 'debt-shy' SMEs
  • address issues in the banking system that might prevent SMEs accessing finance.

Michelle Crickett, director of research at ICAS:

"This research identifies a new category of 'reluctant borrowers' and we believe that government, banks and others with an interest in SME funding should consider how these debt-shy borrowers can be transformed into willing borrowers in the interests of economic growth."

Dr Ross Brown, researcher at the University of St Andrews, said:

"The fact that many high growth SMEs are 'reluctant borrowers' may be holding back the economy. Stimulating the 'demand' for lending matters for economic growth."