Bank of England’s recent survey has revealed that the UK small and medium-sized enterprises (SMEs) are preferring internal funding over external borrowing, with 70% opting for slower growth rather than accruing debt. 

The survey, which gathered responses from 2,885 SMEs, was conducted in partnership with the UK Department for Business and Trade.  

It found that more than 80% of the businesses that invested had utilised at least some internal funds to finance their investment, with 50% of the businesses not utilising external financing at all. 

Bank loans, personal funds, and trade credit emerged as the most common external financing sources. In contrast, the uptake of non-bank debt and equity finance was notably low.  

Approximately 40% of businesses reported using two or more finance sources for investment, underscoring the significance of internal funds and bank loans for SME investment. 

The businesses cited financial constraints such as high borrowing costs and stringent collateral requirements, along with economic uncertainty as primary reasons for underinvestment.  

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Nearly a quarter of the businesses (22%) felt they had invested too little in the past three years, with 58% of these businesses attributing this to expensive credit, and 55% to the inability to borrow at reasonable rates. 

Furthermore, 33% of the businesses that underinvested pointed to insufficient collateral as a barrier, which could be linked to a higher proportion of intangible investments.  

These intangible assets are challenging to use as collateral, potentially exacerbating borrowing constraints for firms with intangible-intensive operations. 

The survey also delved into the types and motivations behind business investments. Investment in technology or IT was reported by 60% of the businesses, followed by the acquisition of plant, machinery, and vehicles, as well as staff training, both at 52%.  

Additionally, nearly 30% of businesses invested in new product development and research and development, indicating a focus on innovation and growth.