• Research shows SMEs are using credit cards and loans to fund their business
• UK Finance figures reveal small businesses are relying on savings 

Paula Bui knew the difficulties that come with launching a small business, having already run a restaurant with her husband during the pandemic.

So when she launched her artisan chocolate business in 2021 she thought she knew how to navigate the peaks and troughs of being an entrepreneur. 

But last month she was forced to take out a personal credit card to tide her over the Christmas period, and research by Shawbrook shared with This Is Money suggests she is not alone.

Nearly half of SMEs are currently using a personal credit card to fund their business, and one expert says the lack of access to funding is effectively debanking small businesses. 

SMEs resort to savings and credit 

The majority of SMEs surveyed by Shawbrook are currently using their own money to fund their businesses.

Most entrepreneurs starting out don’t have access to venture capital funding, which has been a popular route for tech-heavy startups. Small businesses in their infancy tend to start out with a small pot of cash that they’ve squirrelled away.

However, Shawbrook’s research shows that it is not just SMEs in their earliest stages using personal finance to fund the business and figures published by UK Finance support the data.   

In the third quarter of 2023, gross lending is down by a fifth with SMEs relying on personal savings to see them through. 

Shawbrook’s survey found that two in five business owners are currently using a personal loan and 46 per cent have had to dip into their personal savings.

Some 45 per cent of SMEs surveyed that turn over between £25-£49.99million a year are using a personal credit card, as well as 47 per cent of those with a turnover of £50-99.9million.

Neil Rudge, head of enterprise at Shawbrook, said: ‘It’s concerning if some of the more established SME owners are relying on their own money simply because they’ve found limited access to funding from traditional providers.’

Cashflow issues are the main worry

Small business owners say that they are using personal credit cards mostly due to cashflow problems, as well as a lack of access to funding.

When Bui, 51, of Ilkley, West Yorkshire, launched Fusion Chocolate she used her personal savings rather than any money from her physiotherapy business. 

After landing a big contract with a big spa hotel in Harrogate, Bui took a punt and moved out of her home kitchen into business premises.

Despite making significant inroads, Bui has been pushed to take out a personal credit card ahead of Christmas.

‘Christmas is a time when my sales skyrocket and I can make a lot of sales and bring in funds to the business,’ Bui said. ‘But to do that I need to make everything upfront and have all the packaging ready to go, which costs thousands of pounds to buy.

‘I can’t start making or preparing for Christmas because I don’t have the cashflow yet to buy the ingredients and packaging. The packaging alone was going to cost me £1,000 and I just didn’t have that spare in the bank account to use it.’

Bui’s mortgage adviser suggested she look at a personal credit card. After some research she found one that would give her £2,000 interest-free, which she could pay off over 12 months.

‘That was the answer to give me the level of funds that I’d need to cover the cost and get production started,’ she said. ‘I can use the money from the sales and then spread that over 12 months.’

Leah Brown, who launched Broadstairs Consulting last year, had a similar experience. Despite receiving angel investment, she has, from time to time, had to use her own cash to top up the business account.

‘It’s a function of cashflow,’ she said. ’It’s one of the things that new businesses have to do. It’s easy to think that the only outgoings are related to personnel costs, but sometimes you get a large invoice into the bank but you need to pay an agency a lump sum, or pay a longstanding subcontractor.

‘Our investment was in tranches so that was the rationale for sometimes needing to inject capital. We weren’t quite ready for the next tranche [but] something needed to be paid. It’s a juggling act until you reach consistent revenue across the board.’

Are small businesses being debanked?

Taking out a personal credit card was a last resort for Bui, who had come up against a number of obstacles along the way. 

‘I looked at grants but I couldn’t tap into them,’ she said. ‘I don’t employ anyone at the moment so I’m too small to get any of the funding that might be available.

‘When I looked at business loans, the level of interest and the amount that they wanted you to borrow was too big a risk.’

Rich Wagner, chief executive of SME bank Cashplus, said high street banks are often ‘unwilling to lend or even provide a simple current account’ to small businesses, which ‘remain badly underserved.

High street banks continue to ignore the requirements of small businesses  Rich Wagner, Cashplus Bank CEO 

Wagner said: ‘Issues around access to banking for political figures have rightly received a lot of attention in recent months, however, I’m much more concerned about the chronic underservicing of large customer groups in the UK, notably small businesses.

‘High street banks continue to ignore the requirements of these businesses, particularly early stage businesses with a smaller footprint or no credit record.’ 

Bui has resorted to paying for a business strategist to look into grants that are available to a business her size.

Shawbrook’s research shows that company credit cards have emerged as the most popular form of credit for SMEs, however. Bank loans were used by 47 per cent of SMEs with over 100 employees, but just 36 per cent of smaller SMEs.

Rudge said: ‘There’s a lack of awareness regarding the plethora of options available to SMEs via specialist lenders and while credit cards, borrowing from family and personal loans can be the right option for some smaller businesses, it will rarely be a sensible or productive long-term solution.’

Personal guarantees a ‘straitjacket’ on growth 

The Federation of Small Businesses (FSB) recently wrote to the Financial Conduct Authority regulator highlighting the ‘harsh’ lending practices of banks that demand personal guarantees for business loans.

It is bad news for business [and] it’s bad news for the economy as a whole  Martin McTague, FSB national chair 

Personal guarantees force entrepreneurs to put their homes or other assets on the line when taking out finance which can be paralysing for those looking for small loans.

The FSB said SMEs are put off from proceeding with loan applications and turn to more expensive options, like credit cards. 

It has asked the FCA to consider asking the Treasury to expand its regulatory perimeter to help more small businesses, particularly limited companies where directors provide personal guarantees.

FSB national chair Martin McTague said: ‘Put yourself in the shoes of an entrepreneur who’s created a promising business and is keen to grow. 

‘You approach your bank for a small loan, but they say you can only have the money if you sign a personal guarantee which would ultimately put your family home or other assets at risk. This is a straitjacket on small business growth.

‘It is no wonder that many small business owners in that position are telling us they are choosing to avoid external funding which they could be using to capitalise on new opportunities.

‘It’s bad news for the individual business – and, zooming out, it’s bad news for the economy as a whole, at a time when we’re looking for economic growth and productivity gains.

‘For amounts which are triflingly small for banks, but potentially transformational for small business owners, a strong dose of proportionality is required rather than a blanket imposition of personal guarantees.’