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ICAS: Government must address ‘debt shy’ SMEs

High-growth businesses are reluctant to access external finance, while credit policy initiatives target the wrong firms, study finds

HIGH-GROWTH SMEs continue to have a “debt shy” attitude to external finance, despite government initiatives to increase access to business credit.

An ICAS study into funding challenges for smaller businesses found companies with rapid growth are more likely to raise cash through bank lending than equity finance, but tend to draw on internal resources to develop their business where possible.

While acquisitions were an important part of growth strategies, many of the fastest-growing companies were cautious in their financial approaches, focusing on maintaining balanced growth. As such, retained earnings were a popular way to fund growth. Entrepreneurs were found to be “resistant to outside intervention”, even as part of business development.

This reticence was often due to “the fear of banks or other lenders having too much control over their business, such as having the ability to alter or re-negotiate lending conditions”, ICAS said.

Government policy has focused on improving access to credit for “discouraged borrowers”, the study said. However, the research found high-growth businesses were often “reluctant borrowers” which are unwilling to take on debt, rather than put off from applying due to the perception they will be turned down.

As well as failing to address the issue of “debt shy” SMEs, initiatives to improve the supply of credit to smaller companies “is often poorly targeted” to those unlikely to achieve significant growth, the report said.

Initiatives to provide long-term sources of large-scale debt finance, such as the British Business Bank, “seem appropriate”, but the project “should examine demand stimulation mechanisms to that growth-oriented SMEs are encouraged to seek external finance”, it added.

The report concluded: “Attitudinal change is required to transform ‘reluctant borrowers’ to ‘willing borrowers’ for both debt and equity finance. Pro-active efforts are required by policy makers and funders to promote the demand for finance.”

Earlier this year, ACCA called on the government to improve financial literacy and infrastructure in order to boost growth in the SME sector.

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