SME owners need a year’s financial buffer to feel safe: despite existing debts

With interest rates expected to rise during 2018, over four in 10 admit to having no such backup and average monthly debts of £3.6k

Nearly a third (28%) of small business owners don’t feel financially confident unless they have a buffer big enough to cover running costs for a year, according to new research* from merchant services provider Paymentsense (https://www.paymentsense.co.uk). The study found that despite this, more than four in 10 small business owners (41%) admit to having no such buffer in place, meaning as many as 2.3m UK small businesses may have no financial backup plan.

This ‘financial confidence gap’ between what business owners need to feel secure, and what they actually have, comes after the British Business Bank published a report revealing that small business confidence and demand for finance are declining.

The government-owned development agency found the proportion of businesses confident of loan approval fell recently from 58% to 43%. The report also highlighted that lending was flat to small businesses in 2017.** These findings arrive at a time of uncertainty over European trade negotiation outcomes, and reports of an expected medium-term interest rate increase.

For those businesses that do have something in reserve, Paymentsense found that the most popular backup is cash savings – held by nearly six in 10 (59%) of prepared businesses. A third (34%) said their buffer included property and nearly a quarter listed an overdraft (23%). Plant and machinery featured for a fifth (20%), with 17% using business credit cards.

Michael Foote, who founded UK price comparison site Quote Goat (https://www.quotegoat.com) in 2015, said: “As a small business owner, feeling financially secure has always been one of my top priorities. For me, this means ensuring I have a cash buffer that covers company costs for at least half a year, to safeguard against potential cash flow problems.

“Initially it was difficult to build and meant taking the bare minimum out of the business whilst it grew. However, it’s let me focus my efforts elsewhere in the business, enabling Quote Goat to successfully compete against larger competitors in the industry.”

The Paymentsense study also found that almost two thirds (61%) of SME owners are in debt, with monthly repayments averaging almost £3,600 (£3,589). What’s more, over half (55%) admit to deliberately paying suppliers and partners late to ease cash flow problems. More than a fifth (21%) said they do this at least once a month.

Guy Moreve, head of marketing at Paymentsense, comments: “We know that feeling financially confident is critical for small business owners. Aside from helping you sleep at night, it enables accurate long-term fiscal planning for growth rather than just survival. Having a buffer is just part of the picture. Cash flow monitoring and proactive credit control are also essential. However, we’d caution against routinely delaying invoices to partners and suppliers, as it risks damaging important business relationships.

Working with over 60,000 small businesses across the UK, we understand their financial anxieties. Despite recent drops in the rate of inflation, a future increase may lead consumers to become more cautious with their purchases, and would make existing business loans more expensive to manage for SMEs. With this in mind, having a buffer makes great business sense. Actively setting aside a little each month will help balance slower trading periods, and unforeseen expenses. Even something as simple as a weekly cash flow report can provide insights that will enable you avoid future problems.”

The most popular financial buffer

Cash Savings	59%
Property	34%
Overdraft	23%
Plant / machinery / equipment	20%
Business Credit Cards	17%
Asset-based lending / factoring/ invoice finance	16%
Bank Loans	14%
Stocks and investments	13%
Help from family and friends	8%
Government funding scheme	8%