Small businesses rely on personal loans

Published:  02 February, 2010

LONDON: Inhospitable bank lending conditions prompted 28% of business owners to turn to friends, relatives, and company directors to secure funding for their business, said a survey.

The study conducted by commercial credit referencing agency Graydon UK and the Forum of Private Business also showed that 8% of businesses sought financial support through directors' personal credit cards.

According to the report, 40% of those looking for credit during the second half of 2009 were unsuccessful in accessing finance, with 52% refused business loans and 38% refused extensions on their overdraft facility.

Graydon UK believes that this move towards individual financing may have contributed to the growing number of personal insolvencies reported by the Insolvency Service in the third quarter of 2009, which contrasted notably with an unexpected fall in corporate insolvencies of almost 5% within this same period.

Martin William, managing director, Graydon UK, said: "With over a third of small business owners taking on personal risk to stay afloat, official corporate insolvency figures may have been masked by growing numbers of individuals putting their own finances on the chopping block, instead of those of their business."

Phil Orford, FPB chief executive, said: "The continuing credit drought means more entrepreneurs are being forced to seek alternative sources of finance – including family, friends and personal loans. The latest insolvency figures show that this level of personal risk is unsustainable. The danger is that the UK will become increasingly uncompetitive as fewer people are encouraged to start their own businesses."

Graydon UK and the FPB's research also found that businesses are anticipating another difficult year ahead, with almost a fifth (19%) expecting access to finance to be the main obstacle to their business during 2010.

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