In recent years, a growing number of UK SMEs have turned to personal finances to support their business operations and growth, as traditional financing options from banks become increasingly restrictive.
This article explores why SMEs are relying on personal credit, the potential risks, and alternative options that could help business owners navigate financial challenges while preserving their personal financial health.
Why SMEs Are Turning to Personal Finances
The shift towards personal financing among SMEs has been significant. Research from Shawbrook Finance reveals that 71% of SME decision-makers used personal funds to finance their businesses in 2024, a notable rise from 68% in 2023. This trend suggests an increasing reliance on personal financial resources as external funding options become less accessible.
“While it’s concerning to see an increase in the number of people dipping into their personal finances to fund business growth, it is positive to see an increase in those accessing alternative finance as well.”
The tightening of bank lending criteria has pushed SME owners, even those leading larger businesses, to use personal resources to sustain and expand their companies. Many cite difficulties in obtaining affordable financing and the rising costs of operation as primary reasons for using personal funds.
- 54% of SMEs reported using personal credit cards.
- 53% relied on personal savings.
- 39% took out personal loans.
Even in larger SMEs (100-249 employees), owners are increasingly turning to personal finances:
- 55% used personal credit cards
- 49% used personal savings
- 42% took out personal loans.
This dependence on personal resources underscores a growing financial strain on UK business owners, who are often faced with the challenge of funding expansion while managing increasing operational costs.
Alternative Finance Options on the Rise
In response to these challenges, many SMEs are turning to alternative finance options. According to Shawbrook Finance, 78% of SMEs accessed alternative finance in 2024, an increase from 73% the previous year. These options provide businesses with more flexibility and reduce reliance on traditional bank loans. Some of the most popular alternatives include:
- Invoice Financing: Over half of SMEs (56%) are considering invoice financing, up from 48% in 2023. Invoice financing enables businesses to borrow money against outstanding invoices, providing a valuable cash flow solution for companies awaiting payment from clients.
- Asset Financing: In 2024, 47% of SMEs used asset finance, a slight increase from 43% the previous year. This type of financing allows businesses to secure funding using assets they own, such as equipment or machinery, making it a valuable option for capital-intensive industries.
These financing solutions allow SMEs to preserve cash flow without using personal resources or taking on high-interest debt. The rise in popularity of these options highlights the growing awareness of flexible finance solutions tailored to SME needs.
The Risks of Using Personal Finances for Business
While using personal finances may seem like a convenient short-term solution, it poses significant risks:
- Credit Score Impact: Relying on personal credit can negatively affect an individual’s credit score, making it harder to secure personal loans, mortgages, or other credit needs.
- Personal Financial Security: Using personal savings and loans can jeopardize an individual’s financial security, especially if the business faces unexpected challenges or fails to deliver a return on investment.
- Strain on Personal Relationships: Financial stress can also impact personal relationships, especially if funds are shared with a spouse or family.
“SMEs are undoubtedly the backbone of the UK economy. As the government looks to get the economy back on track, it’s crucial that this cohort is not left behind.”
Why Traditional Lending is Becoming Less Accessible
Traditional bank lending has become increasingly difficult for SMEs to access. Banks have tightened lending criteria, raising barriers for businesses that may lack extensive credit history or substantial collateral. This has led to an environment where smaller or newer businesses find it challenging to secure affordable loans, leaving them with fewer options for growth funding.
According to a report by UK Finance, the value of new loans to SMEs dropped by 23% in 2023, highlighting a decline in bank lending activity towards small businesses. This shift underscores the need for more diverse financing options that cater to SMEs’ unique needs and financial limitations.
How SMEs Can Build Financial Resilience
While personal financing might be necessary in some cases, it’s vital for SMEs to explore other options and strategies to build financial resilience. Here are some recommendations:
- Explore Government Support Schemes: The UK government offers various support schemes for SMEs, including grants, loans, and tax reliefs that can help alleviate financial pressure.
- Build a Strong Credit Profile: SMEs with robust credit profiles are better positioned to access loans. Maintaining accurate financial records and demonstrating consistent cash flow can improve a business’s creditworthiness.
- Consider Flexible Finance Options: Alternative finance options, such as asset finance and invoice financing, offer valuable cash flow solutions without the need to dip into personal finances.
- Create a Cash Flow Management Plan: Effective cash flow management can reduce the need for additional financing. SMEs should regularly assess cash flow projections and make adjustments to align with growth and operational goals.
Final Thoughts
The current economic landscape presents significant challenges for UK SMEs, from rising operational costs to restricted access to traditional financing. As more SMEs turn to personal finances to fund growth, the risks associated with such decisions continue to increase.
It’s essential for SME owners to explore alternative financing options that align with their growth objectives while preserving personal financial security. The increase in invoice and asset financing, as well as the rise in government support initiatives, presents viable paths for business owners looking to fund their operations without jeopardizing their financial well-being.
How Glow Accounts Can Help Your Business Thrive Without Risking Personal Finances
At Glow Accounts, we understand the unique financial challenges that SMEs face. Our team provides expert guidance on sustainable funding options, helping you avoid the need to rely on personal finances. With our support, you’ll gain insights into cash flow management, flexible financing solutions, and financial resilience planning tailored to your business needs.
Whether you need advice on alternative finance options or help navigating cash flow issues, Glow Accounts is here to support your growth. Let us help you explore ways to strengthen your financial foundation and safeguard your personal finances.
Contact us today today to learn more about how we can help secure your business’s future or email us at info@glowaccounts.co.uk or call 01892 267 750.
