UK small and medium-sized enterprises (SMEs) are increasingly using personal finances to sustain their businesses amid tightening lending conditions. Recent research reveals that 71% of SME leaders relied on personal funds in 2024, up from the previous year. With economic pressures mounting, many business owners are resorting to savings, credit cards, and loans to meet financial demands, highlighting the challenges of accessing traditional financing.
Increased Use of Personal Funds
The latest Shawbrook Finance survey shows a sharp rise in SME owners using personal credit cards (54%), savings (53%), and loans (39%) to cover business expenses. Even larger SMEs, with 100–249 employees, reported significant reliance on personal resources, with 55% using credit cards and 49% drawing on savings.
These trends reflect the difficulties SMEs face in obtaining traditional funding, leaving personal resources as a fallback. However, this approach often places significant strain on business owners’ financial stability.
Exploring Alternative Financing Options
As traditional lending remains restricted, SMEs are increasingly turning to alternative funding sources. In 2024, 78% of SMEs utilised alternative finance options, up from 73% in 2023. Popular choices include:
- Invoice Financing: Used by 56% of SMEs, up from 48%, enabling businesses to access funds tied up in unpaid invoices.
- Asset Financing: Gaining traction, with 47% of SMEs using this option in 2024, up from 43%. It allows businesses to secure loans against company assets.
These solutions help SMEs manage cash flow while reducing reliance on personal finances.
Rising Costs Add to Financial Pressures
Economic challenges such as inflation and operational cost increases are further straining SMEs. In 2024, 73% of SME leaders highlighted rising costs as a primary concern, up from 69% the year prior. Factors contributing to this pressure include:
- Inflationary Costs: Rising expenses for utilities, raw materials, and wages are cutting into profitability.
- Employer National Insurance Increase: A 1.2% rise, effective April 2025, will add to SME expenses, affecting most businesses except the smallest employers.
Faced with these challenges, SME owners are increasingly turning to both personal and alternative financial solutions to maintain operations.
Risks of Relying on Personal Finances
While using personal funds may bridge short-term gaps, it poses significant risks, including:
- Financial Instability: Depleting savings or over-relying on credit can jeopardise personal financial health.
- Increased Stress: The financial strain can impact business owners’ mental well-being.
Neil Rudge, Shawbrook’s Chief Banking Officer for Commercial, acknowledged these challenges, stating: “While it’s concerning to see more business owners using personal funds, the rise in alternative finance adoption is encouraging. SMEs remain the backbone of the UK economy, and they need ongoing support.”
Supporting SMEs Through Financial Challenges
To reduce reliance on personal finances, SMEs require enhanced support from government and financial institutions. Key measures include:
- Improved Access to Finance: Streamlined loan processes and alternative funding options tailored to SME needs.
- Targeted Policy Support: Relief programmes to help SMEs navigate inflation and rising costs.
By prioritising accessible and sustainable financial solutions, policymakers can help SMEs maintain growth and resilience, ensuring their critical contribution to the UK economy continues.
Conclusion
As SMEs navigate rising costs and limited lending options, personal finances have become an essential yet risky lifeline. Alternative finance solutions like invoice and asset financing provide a path to stability, helping businesses preserve cash flow without jeopardising personal financial health.
Supporting SMEs with robust funding options and targeted relief will be vital to sustaining this crucial sector and the broader UK economy.
FAQs
- How many SMEs rely on personal finances?
71% of SME owners used personal funds in 2024, according to recent research. - Why are SMEs using personal finances?
Limited access to traditional bank loans and economic pressures are driving this trend. - What are the top alternative finance options for SMEs?
Invoice financing and asset financing are increasingly popular among SMEs. - How are rising costs affecting SMEs?
Inflation and an upcoming rise in employer national insurance contributions are adding financial strain. - What risks do personal finances pose to SME owners?
Reliance on personal funds can lead to financial instability, stress, and long-term financial challenges.
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