Borrowing behaviours of cash based small businesses

  • Picking out the genuinely useful indicators in amongst the myriad finance-related surveys doing the rounds can be hard work at the best of times, not least when the headline writers get a tad overzealous in their efforts to catch the eye.

    The recent survey from Liberis, the specialist SME lender supported by the British Business Bank, is a case in point.

    The Liberis survey is a perfectly useful piece of research into the borrowing intentions of its customers. Bearing the title ‘SME Business Investment 2016-17’, the survey was conducted between 321 of its own customers and, amongst other things, found that 68% of the respondents are looking to apply for business finance in the next year and a healthy 46% will be choosing alternative finance for their needs. Great news for Liberis.

    This, of course, does not mean that 68% of all SMEs are planning to borrow and that 46% will be using alternative forms of finance as some of the headlines have reported. Such a finding would fly in the face of all the other data.

    The Q2 SME Research Monitor report from BDRC (based on 100,000 interviews) released last month claimed that 8 out of 10 businesses were basing their growth plans on what they could afford to fund themselves. 71% of interviewees agreed that they would accept a slower rate of growth rather than borrow to grow more quickly – 82% of SMEs declared themselves “happy non-borrowers.” The news prompted The Times to run the headline: “Businesses turn their backs on the banks, borrowing and debt.”

    So, what can we learn from the survey?

    To find the answer, we must dig down into the statistics and understand what we are looking at.

    For example, the Liberis survey is conducted among businesses that are mainly cash based: pubs, restaurants, hotels, beauty salons and fashion retailers make up the bulk of the customer base. They are also small businesses overall, with the opening turnover classification starting at £0-£50k. This is a large part of the economy and an important sector to understand.

    The respondents are existing customers of Liberis, so we might reasonably assume they have a greater propensity to borrow, and a greater propensity to use alternative finance, than the sector as a whole. For this reason, the headline statistics probably don’t tell us too much more than the levels of repeat business Liberis can look forward to next year.

    There are though some findings that are of interest to a wider audience.

    We learn that 50% intend to borrow to finance expansion, including opening new outlets or investing in new projects. 30% are looking to invest in each of equipment, stock or refurbishment, and roughly 30% will need to cover cashflow, including settling tax bills and, in a small number of cases, payroll (respondents could choose more than one option).

    The amount of debt these businesses are looking for is unsurprisingly small, with only 8% wanting more than £100k. May and September are shown to be the peak borrowing months with little activity in November, December and January. There are some interesting sector comparisons in the report, which are worth looking at by those wanting the detail. 

    We see that credit cards are turned to by 33% of the respondents, which before we jump to the conclusion of them being a last resort, could make perfect sense if the credit is used to buy stock that can be sold quickly enough to avoid incurring interest charges. The intrinsic convenience of credit cards should not be overlooked.

    Also of interest is the fact that 38% of the small businesses still use a bank overdraft, an indication perhaps that those predicting the demise of such facilities are a little premature in their view. Maybe the banks are being more supportive than we are sometimes led to believe.

    From a purely marketer’s point of view, it is notable that 58% of the respondents identify Facebook as a key communications medium, which aligns with our own experience of it as an effective engagement tool for small businesses; radio runs a close second at 56% and newspapers follow up at a still impressive 50%. Maybe the sector is missing a trick and could make better use of the broadcast media to improve market share. That’s a topic for another day.

    As for Liberis, Head of Marketing, Adam Little, tells me that they intend to run a survey at least once a year, which should allow for some further insights when trends can be established.

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