Business & Finance

Why Britain’s SMEs Are Saving Money and Why it Could Be A Good Thing

Why Britain's SMEs Are Saving Money and Why it Could Be A Good Thing
December 18th, 2013
Author: Economic Voice Staff

Stashing The Cash: Why Britain’s SMEs Are Saving Money – And Why That Could Be A Good Thing

Recently, new postcode lending data revealed that UK small businesses were concentrating on stockpiling cash now more than ever. In fact, in 95 per cent of postcode areas, businesses had more cash on deposit in 2012 than 2011, as across Britain, SMEs start to build up savings and pay down debt.

But why?

Well, it’s fair to say that since the financial crisis, the level of trust in high-street

banks crashed with the economy. Instead of living on the edge believing that money would be accessible to borrow when required, SMEs suddenly found themselves out in the cold unable to get the help they needed.

So that’s how small business owners came to help themselves; if borrowing funds wasn’t an option anymore, they’d have to build their own.

 

Why does it matter?

Well, for the wider economy, this could spell good news. Believe it or not, Britain’s SMEs account for 99.9 per cent of UK businesses, amassing £3.1tn worth of the country’s annual wealth – just under 50 per cent of overall turnover.

By making their own provisions and going some way to re-claim their independence, at least one half of the UK economy has essentially hauled itself onto a strong financial footing.

Lessons from the Mittelstand

In recent years, the German Mittelstand businesses have emerged as a shining example of resilience and success. To illustrate, 98 per cent of all industrial enterprises in Germany are Mittelstand businesses. These medium-sized, usually family-owned, companies represent a fifth of the country’s total revenue. Usually generations old, they carry one key objective: longevity.

Probably the most famous example of a classic Mittelstand company is Haribo. Herwig Vennekens, Head of Haribo believes the success of this kind of enterprise can largely be attributed to their resistance to high-risk investments and their long-term financial planning.

The fact is that businesses with the ability to unlock cash reserves have the strongest chance of survival.

Ok… but what about investment?

The fact remains that a quarter of UK companies admit to operating with machinery that needs replacing and 65 per cent of these firms incur lost orders because of it.

SME growth is undoubtedly fundamental to the strength of the UK economy, and investment is part and parcel of this. Borrowing funds for new machinery and equipment is essential to enabling companies to evolve with their market. So if SMEs are borrowing instead of saving, where does that leave us?

Well, some key regions of growth, such as the North West and North East, are receiving more bank finance than their relative size, suggesting that where needed, finance is available. And, with the Chartered Institute of Purchasing and Supply recording that Britain’s manufacturing sector saw its strongest growth in over a year in May 2013, it seems funding is being put to good use.

So lending hasn’t gone out of the window, rather it’s become more responsible. After all, there is a particular merit to businesses having their own pot to draw from in times of need.

An Alternative Solution

Given the reluctance to slip back into old habits by taking out loans with traditional high-street banks, savvy companies are instead turning to alternative sources of funding, including asset-based finance, peer2peer lending and crowd-funding.

Saving 1 © The Economic VoicePeer-to-Peer Lending: an increasingly popular concept in recent years, P2P lending schemes link willing lenders with those who need to borrow cash to sustain or grow their business. For lenders, this provides an opportunity to invest their money into small, innovative firms for a percentage of financial return. Crowd-Funding: Crowd-funding is more of a solution for entrepreneurs working to get the cogs turning with a new invention or business idea.

Crowd-funding sites exist as a means to raise money for innovation from apps and music to art and new inventions, with lenders more likely to receive a free download or product sample than a financial return on their investment.

Asset Finance: essentially allows companies that need to make an investment into new machinery or equipment, to do so through a lending arrangement. In instances such as these, the lender will procure the equipment on behalf of the borrower and allow them to either pay them back for the value of the asset until they take ownership (hire purchase), or retain ownership but allow the borrower to lease the equipment for an agreed period of time (lease finance).

Alternative funding providers are opening up opportunities for innovation and providing new ways for small businesses to move forward. It’s estimated that limited awareness of asset finance amongst Britain’s SMEs could be costing around £5bn in lost business.

However, no form of funding is a ‘one size fits all’ solution, so SMEs should be careful to weigh up the options available to them. One thing’s for certain, the increasing number of businesses that have savings on their side will retain a greater amount of stability and flexibility for future success.

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