Why Your “Fear of Funding” Could Mean the Downfall of Your SME

Estimated Read Time: 6 Minutes

Jessica Lambert, 25 June, 2019

You weighed up the risks, took the plunge, you’re now a proud business owner and your venture is still thriving months after launching. Congratulations – you have already surpassed the majority of individuals who have big ideas that unfortunately never come to fruition.

But in order to remain at the forefront of your industry and stand out from the competition, your business needs to continue to grow and evolve into its full potential. How do you achieve all those huge growth aspirations without working capital to do so?

Well, you don’t. Or at least that is the harsh reality for most SMEs in today’s hugely competitive landscape. A recent report by SME Finance Monitor found that 80% of SMEs agreed that their growth plans are based on what they can afford themselves, with 73% opting for slower growth over borrowing to grow faster. But this fear of funding means that so many businesses ultimately fail despite having huge amounts to offer their potential demographic.

 

Bad Cash Flow: The Real Reason Why 82% of Small Businesses Fail

It comes as no shock to most entrepreneurs that the number one reason why businesses fail is due to cash flow problems. It is a widespread problem that all businesses face and the fear of going under stems mostly from cashflow forecasts that confirm a business, is indeed, in the red. 

According to the Office of National Statistics, maintaining cash flow is the biggest obstacle for businesses, with between 80-90% failing due to cash flow problems. 

Around 10% of UK SMEs receive payments later than scheduled, with the average late invoice finally being recovered 74 days later. In fact, research found that SMEs in the UK lose more than £2bn every year due to this widespread issue. This is just one of the ways in which a business can find itself faced with the reality of bad cashflow.

In fact, there are some industries that operate in a world where cashflow is always a huge concern, such as the construction industry. Often, construction companies land large, long-term contracts that are accompanied by lengthy milestone payments. The nature of the construction industry means that these types of businesses are expected to front the eye-watering costs involved for the duration of the contract – and then eventually receive a large sum of funds once the project is complete.

 

If Cash Flow Is a Major Pain Point for SMEs, How Can Your Business Overcome It?

Having healthy cash flow is central to a business that is successful and beating the odds. If you are adamant that your SME is going to be part of the 20% of businesses that storm past the 18 month milestone, you need to master how to maintain healthy cash flow.

In order to do that, you need to first overcome your fear of external finance as without it, your business and its ability to grow may well be stunted.

According to research, over a quarter of UK SME owners avoid accessing external finance due to the fact they have an overwhelming “fear of funding”. This research brings to light the true attitudes of small businesses in the UK, which explains why lenders are still experiencing a reluctance from SMEs to borrow the money they desperately need.

This unwillingness to borrow money likely stems from the idea that borrowing a loan in any form is still considered taboo. It is generally a given that most SMEs want to grow, but a huge percentage of SMEs avoid doing so if it involves borrowing external finance.

However, what demonstrates that a fear of funding is a prevalent issue amongst SMEs – and not simply the inability to access funding - is that the research also found 59% of respondents believed they could access the financial backing needed if they applied.

Additionally, over half claimed to have a full awareness of the funding options available to them and 44% felt that borrowing money would only create further concerns for their business.

It is safe to say that there is a cautious approach to external business finance, especially for small and medium sized companies. Perhaps the lack of confidence ties in with Brexit uncertainty or it could still ultimately be that commercial loans are perceived to be a last-ditch effort to save a business and something to be avoided at all costs.

 

“Better Safe Than Sorry” – Perhaps Not When It Comes to Business Finance…

Erring on the side of caution is not always the best approach and this is especially the case when it comes to securing credit for your business. Being hesitant with regards to attaining external finance and playing it safe will not always necessarily equate to keeping your business afloat – and unfortunately, there are many failed SMEs that have learnt this the hard way.

  • Cash flow problems are the main culprit for the downfall of most SMEs
  • Almost one in seven SME owners can't pay staff due to cashflow issues
  • 60% of SMEs are worried about their ability to finance long-term growth
  • 68% of SMEs agree that their aim is to pay down debt and remain debt free moving forward


The top challenges for small businesses are cash flow, the costs of running a business and credit availability – or a lack thereof. However another huge issue amongst SMEs is a lack of awareness surrounding credit and those all-important credit reports. According to Experian, 59% of small firms admit to having never checked their business credit score and of those who had checked, 56% confessed to not having checked within the last six months. 

Plenty of small businesses eventually come around to the idea of taking out a commercial loan, only to have their application rejected due to a poor understanding of their very own credit report.

Whilst sifting through pages and pages of business data might seem like a mundane task that can be avoided, it is a better idea to get to grips with your reports, as credit checking your business is an essential element of maintaining healthy cash flow and credit control. 

Asset Based Lending is a fantastic way to access working capital at competitive rates, so if your business has property or machinery to use as collateral, this popular funding product could enable your business to make the changes required to meet its full potential.

Our Cash Flow Finance product could be the perfect fit for your business if you have three years trading history under your belt. Our customers use this funding product to handle the peaks and troughs caused by seasonality, to overcome the issues faced with long payment terms and even to expand.

 

As they say, failing to prepare is ultimately preparing to fail, so if your business avoids accessing external credit during the times it needs it most, you might find that it struggles to flourish into the hugely successful business venture it was always intended to be.

If you are experiencing cash flow challenges or want to realise your business growth plans, get in touch with our team of Funding Specialists today on 020 7839 9451 or email contact@nucleus-cf.co.uk.



BY Jessica Lambert

25 June, 2019

6MIN

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