Finance: Credit on the cards

Phil Orford FPB

Phil Orford MBE discusses the use of credit cards by SMEs

Expert: Phil Orford MBE

Company: Forum of Private Business

Backround: Chief executive of the Forum of Private Business, an organisation focused on aiding the growth and profitability of SMEs

Despite further signs of economic recovery, the latest information from the Finance Monitor for SME lending highlights the Forum of Private Business’s continuing concern that confidence in the banking industry remains an obstacle to supporting economic growth. The report indicates a continued rise in the use of credit cards from 15% in the fourth quarter of 2012 to 20% in the third quarter of this year. This is in contrast to overdraft use for the same period, which has decreased from 20% to 16% despite falls in associated costs.

The findings could suggest that business owners are using credit cards as a short-term solution to cash flow issues and to side-step overdraft charges. This worryingly could indicate that an increasing number of struggling businesses are racking up an unsustainable amount of debt. 

While there is evidence banks have taken steps to resolve this through proactivity in pre-authorisation of overdrafts, this does not necessarily help those firms which are becoming increasingly reliant on credit cards for their short-term survival.

Confidence levels also suggest that businesses continue to see the trading environment as extremely challenging. After the most positive business sentiment since its inception, with 51% of small firms looking to grow their businesses in the next 12 months, confidence has dropped to 47% with 36% of businesses reporting growth over the last 12 months compared to 44% in the previous quarter.

The report also highlights a fall in the proportion of businesses injecting personal funds from 38% from 42% in the last quarter, as businesses have reverted to using their profits as opposed to personal assets or bank funding to finance future growth. 

This latest data further pinpoints the urgent need for the banks to convince the small business community that they are here to support businesses looking to grow. Without clear support and positive action from the banks, this could remain a continuing obstacle and threat recovery in 2014.

When it comes to business finance, it is vital that banks take further steps to be more proactive in providing the liquidity businesses need rather than seeing further increases in the use of credit card finance.




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