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Small firms are applying for new finance to manage cash flow rather than to invest in their businesses, according to new research which further exposes the late payments crisis.

Fewer than one in four used money raised in the last quarter to update equipment, while even smaller numbers used funds for expansion of their business (16%) or recruitment (2%).

The late payment crisis leads to the closure of 50,000 small businesses a year at a cost of £2.5 billion to the economy. The latest figures from Pay.UK show that the balance of outstanding late payments almost doubled to £23.4 billion in 2019. 

Mike Cherry, national chairman of the Federation of Small Businesses, said: “If this Government wants to leave a lasting legacy amongst small businesses, it has to make ending the UK’s late payment crisis a top priority.

“It’s troubling that so many external finance applications are driven by cashflow 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. 

“We fought hard for a package of late payment reforms under the last administration. Frustratingly, it was put on ice due to the general election. We’ll be working closely with the new small business commissioner to resurrect it.” 

Four in ten (40%) small firms describe credit as ‘unaffordable’ – up three percentage points compared to this time last year – despite the fact that a substantial proportion (41%) of successful applicants are being offered lending rates below 4%.

The share of small business finance applications that were approved fell eight percentage points to 63%. Fewer than one in three (27%) firms describe credit availability as ‘good’ – down three percentage points compared to the same period 12 months ago. 

Despite efforts to encourage small businesses to apply for a greater diversity of financing options, the share seeking to access loans and/or overdraft facilities (88%) has hit its highest point since Q1 2016. Far fewer firms sought asset-based (27%), peer-to-peer (11%) or venture (2%) finance. 

Lack of trust in financial services is an issue here

– Mike Cherry, FSB

Major banks issued £18.5 billion of new term loans to smaller firms in the first three quarters of 2019, down from £18.8bn in the same period during 2018, according to UK Finance. The British Business Bank was supporting £6.6 billion worth of small business finance stock as of March 2019. 

Mr Cherry added: “The small business finance market is beset by both supply and demand challenges. 

“On the one hand, you have a substantial share of successful small firms who could be growing more quickly if they accessed external finance, but are reluctant to do so.

“Lack of trust in financial services is an issue here, as are bank branch closures, which prevent small businesses from building in-person relationships with lenders. The general perception that borrowing is expensive – even when that’s not the case a good deal of the time – is also a persistent challenge. 

“On the other, big lenders are often more cautious about lending to small business owners if they approach them in a professional rather than personal capacity. 

“More widely, we need to see a concerted effort from all sides to make small firms aware of all their finance options.

IR35 suspension call

New Chancellor Rishi Sunak has been urged to suspend a tax shake-up for self-employed workers after being warned it will cause “enormous damage” to contractors and the wider economy.

Businesses are planning to cut off contractors or delay work while a third of self-employed workers will stop freelancing amid widespread confusion over complying with the new IR35 rules, according to industry bodies.

The Recruitment & Employment Confederation (REC) and the Association of Independent Professionals and the Self-Employed (IPSE) warned the contractor market has already been severely affected ahead of changes in April to laws clamping down on tax avoidance.

Confidence falls

Small businesses ended a tough 2019 with confidence and profits falling.

In the final quarter of 2019, FSB’s Small Business Index (SBI) fell across the UK.

At the same time, a net balance of 12.9% of small businesses in Scotland reported falling profits.

FSB’s Scotland policy chairman, Andrew McRae, said: “All eyes will now be on next month’s UK Budget to see what the new Chancellor delivers for small firms. 

“Action on the debilitating impact of late payments would be a great place for him to start.  We also need early reassurance that employers will see a practical post-EU immigration system that works for businesses of all sizes.

“At Holyrood, where we have recently seen common sense on business rates prevail, the Scottish Government now needs to focus on moves to rejuvenate our towns and high streets, get more empty units back into use and support the growth potential of our migrant entrepreneurs.”

Despite this fall in confidence from the previous quarter, year-on-year the Scottish confidence index has climbed by 5.5 points.

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