Almost four in 10 applications for credit were used to plug gaps in cash flow, rather than growth or investment, a major study has revealed.
The finding forms part of the Federation of Small Businesses’ (FSB) quarterly Small Business Index, published this week.
According to the report, “managing cash flow” is the most common use of external finance, with 37 per cent of small businesses citing this issue in credit applications.
Just 23 per cent of small businesses, meanwhile, used finance to update equipment, while even fewer (16 per cent) used external finance to expand their business operations. Additionally, just two per cent of applications cited recruitment.
The report comes after figures revealed that late payments are leading to the closure of some 50,000 UK small businesses every year. Statistics also show that late payments almost doubled in 2019 to £23.4 billion.
Commenting on the report, FSB National Chairman Mike Cherry said: “It’s troubling that so many external finance applications are driven by cash flow concerns. This really shouldn’t be the case – you wouldn’t dream of doing your weekly shop and telling the cashier that you’ll pay for it in 100 days, but corporations take this approach to small businesses in droves.  
“The uncertainties facing big businesses over the past few years will have no doubt increased the temptation to use small firms as free credit lines. We need to put that attitude to bed, for good.”
In total, around one in eight (13 per cent) small firms made an application for credit in the fourth quarter of 2019, down 15 per cent compared to Q1 2019. Those that didn’t make an application most commonly cited “unaffordable rates”.
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