News

February 19, 2010

One in five directors using credit cards to fund business

One in five business owners are being forced to use credit cards to keep their firm afloat as they cannot secure bank funding, the Institute of Directors (IoD) has found.

In a survey of 1,045 company directors, the IoD found that a quarter had tried to access finance from their bank over the last year. Of these, 57 per cent said their application had been turned down – despite claims by lenders that they are fulfilling demand.

IoD director general, Miles Templeman, said the results were "totally incompatible" with the banking sector's current position on UK lending to businesses. "It seems that more businesses are turning to forms of unsecured finance, such as credit cards, to get them through their short-term spending needs," he said.

According to separate research by Moneyfacts, credit card fees are at their highest level for 12 years, with the average rate having climbed to 18.8 per cent in February.

Templeman said that firms would struggle if rates went up further. "Any contraction in credit card finance could see significant price hikes, adding to the already grave difficulties that many businesses are having accessing funds," he said.

Independent financial adviser, Yvonne Goodwin, said that unless small firms were managing to pay off the debt each month, using credit card finance was "unhealthy".

"If they're using a card to spread out cashflow and regularly paying it off, then it's not so much of a problem," she said. "But extortionate rates make credit cards an unviable option for most firms, even in the short term.

"If businesses were having no luck with their existing lender, they should move to another bank," added Goodwin. "Try elsewhere, or approach relevant trade organisations to find out which lenders are known to be sympathetic to their industry sector.

"Firms could also consider a short term personal or business loan to tide them through," she said. "Attracting angel investment might be another option for certain businesses that can identify an exit plan."