What is the most common reason SMEs are seeking funding?

Despite record-high inflation and the ongoing 'cost of doing business' crisis, growth is still the most common reason that SMEs are seeking funding, according to research from Growth Lending.

Its survey found that a third (33%) of businesses currently seeking funding are doing so to promote business growth.

Law appears to be the most growth-minded sector, with 67% of those seeking funding citing growth as the reason, with energy and utilities and technology following closely behind at 60% and 54% respectively.

While growth remains a priority for many, the survey of 279 UK SME business leaders found that almost a quarter (23%) are seeking funding to raise additional working capital. And, with more than two thirds (67%) of SMEs having at least £50,000 tied up in late payments, it is possible that many are raising additional funds to create a cash buffer to mitigate the impact of overdue invoices on the business.

The report also found that ongoing economic challenges are taking their toll on SMEs. Almost a fifth (19%) of those seeking funding are doing so to cover increased overheads such as rising energy bills and the higher cost of goods, while 14% are looking to secure funds for contingency planning in the current environment.

In contrast, hiring more staff (6%), investing in R&D (3%) and undertaking M&A, MBO or MBI activity (2%) ranked significantly lower among the reasons for raising funds, suggesting that many are navigating the current landscape with caution. Meanwhile, fears around the current trading environment are holding 32% of SMEs back from raising external investment altogether.

Lauren Couch, managing director of Growth Lending, said: “Despite the challenging backdrop of geopolitical and economic uncertainty, it is positive to see that many SMEs are still operating with a growth mindset and raising investment to support their plans.

“Understandably, caution remains the watchword for many business leaders as more uncertainty lies ahead and for others, it has eroded confidence and paused lending decisions altogether. Frustratingly, rather than being perceived as a means to strengthen and reinforce cash flow in challenging times, it is clear that many still associate certain types of funding with weakness and vulnerability.

“There are a wide range of lending products available to support SMEs and help them to survive – and thrive – in the coming months, whether businesses are looking to unlock the cash tied up in their debtor book, improve cash flow overall, or accelerate growth strategies.

“However the ongoing economic situation and the forecasted impact of recession are likely to cause many lenders to retreat; by starting the funding journey now and looking beyond traditional finance streams, business leaders stand a better chance of receiving the right support to help them remain more agile and resilient in the face of the unknown.”