Business owners use personal savings to stay afloat

Entrepreneurs are smashing their piggybanks to fund flagging ventures, and it could mean trouble down the line, new research shows.

by Rebecca Burn-Callander
Last Updated: 19 Aug 2013

Dipping into savings to get a business off the ground is standard practice. In times of trouble, using your own money to help with cashflow is not ideal, but it happens. VCs often prefer to invest in entrepreneurs with a little skin in the game. But staking your life savings in a dying venture? That’s risky business.  

More business owners are now resorting to drawing on personal savings to keep their companies going compared to 2010, says new research by Bibby Financial Services. Its quarterly Business Factors Index, taken during the last three months of 2011, compared the incidences of using personal savings against bank overdrafts, loans and credit cards. Nearly all the business owners who needed a wedge of cash said they used the former. Only 4% of firms had applied for funding through government initiatives, and bank loans were at the bottom of the pile, despite four out of five high street banks meeting their Project Merlin targets for 2011.

The Federation of Small Businesses has also been looking into the phenomenon. It asked its 11,000 members about their funding sources - a third were using their own savings to keep their businesses going.

And this is a key point: it’s not that business owners are necessarily being turned down for loans. They aren’t even applying in the first place. The cost of credit and fears about the financial state of the UK have made loans much less attractive. 66% of UK business owners have eschewed external funding over the past 12 months – an increase of 11% year-on-year.

But using savings to bankroll a business can be dangerous. As Edward Winterton, executive director at Bibby Financial Services, warns: ‘If businesses continue to tap into their personal savings, which is a worrying trend as this source is not sustainable or designed to help business growth, then we could see insolvency figures increase further throughout the year.’

John Walker, national chairman of the Federation of Small Businesses, adds: ‘What we need to see is better promotion of the alternatives available and for the Government to put in place their bold credit easing plans, which will help small businesses access finance on better terms.'

Find this article useful?

Get more great articles like this in your inbox every lunchtime

Subscribe

Get your essential reading delivered. Subscribe to Management Today