Small firms resorting to 'alternative' forms of finance

Entrepreneurs raising capital from friends, family and selling private assets

29 January 2010 11:04

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More small firms turned to “alternative” sources of finance, such as calling on friends and family or selling personal assets, than applied for bank loans and overdrafts over the past two years, it has been claimed.

According to research by CreditPal, which enables small firms to submit their management accounts to credit agencies, 41% of small and medium-sized firms sought alternative finance in the last 24 months, compared with 35% who applied for funding from a bank or building society.

Small businesses were found to have raised £45bn from alternative sources of finance over the last two years, £22.6bn of which was sought in the last 12 months.

Those sourcing alternative forms of finance have raised £66,624 each on average over the last two years, equating to £2,776 a month.

CreditPal said small business owners have been “forced to sell private assets, or rely on friends and family for emergency finance” in place of traditional lending, and many were fearful of being turned down for bank loans or overdraft facilities.

Chris Poll, CEO of CreditPal, commented: “We believe we have identified an SME fear factor at play, with companies more likely to seek finance from non-traditional sources because they are scared of even applying for finance from banks and building societies.

“We desperately need to see a return to traditional lending if the economy is to return to an even keel.”

The research also revealed that many small business owners have made personal sacrifices for their companies over the past 24 months. Some 15% of those who had sought alternative finance had forfeited a family holiday, while 3% have raided their pension funds.

Around 10% have turned to friends and family for funds, 8% have sold personal assets such as property or cars, while 4% have resorted to private lenders, including loan sharks.

“In the long term the sale of private assets is not sustainable and relying on friends and family for funding can prove a financial and emotional risk if there are problems with repayments,” said Poll.

CreditPal said producing accurate management accounts on a monthly basis can help lenders assess your creditworthiness when applying for loans or overdraft facilities.