UK Business Credit Card Usage Survey

A recent study of SME finances by Warwick Business School has shown that business credit cards are the most widely used financing tool for small and medium-sized companies. SME's spend in excess of £1.8bn on their business credit cards every month, according to the findings of the study, which was sponsored by the Bank of England, the Treasury, employers' groups and retail banks, and is the most comprehensive study of SME financing in the United Kingdom.

An SME is defined as a company with fewer than 250 employees: there are four million such businesses in the UK.

The study, which used a sample of 2,500 companies, found that 55 per cent of SME's used business credit cards; 53 per cent had overdrafts; 24 per cent used term loans; and only 3 per cent used equity finance. Small businesses were generally able to find the financing they needed, but often failed to secure the best possible terms for their borrowing.

There is a need for SME's to have a safety net, however, against short-term problems, according to Stuart Fraser, senior research fellow at Warwick and author of the report. This need is reflected by the £4bn net positive cash position of SME's, who were holding £92bn in total deposits, compared with £88bn that they owed in loans.

Most of the business credit card spending by SME's is for day-to-day bills, such as travel expenses and raw materials, although 12 per cent of the study's respondents said they used their corporate cards to buy equipment and vehicles. Only a small proportion of the money spent on business credit cards is left outstanding as borrowing at the end of the month. Businesses using personal credit cards pay off an average of 79 per cent of these debts in full each month. For business credit cards, the proportion is 95%.

The Federation of Small Businesses - one of the report's sponsors - cites convenience as being the main reason for the heavy reliance on business credit cards. The FSB chairman, Neil Hamper, says: "Credit cards are a convenient method of payment for most business owners, but they can be expensive, particularly for the one in five firms that do not pay off bills in full each month."

The study found that the four big lenders were dominating the small business lending market: HSBC, Lloyds TSB, Barclays and Royal Bank of Scotland serve a total of 82 per cent of all SME banking customers in England and Wales. This figure is 95 per cent in Scotland. Few SME's change banks - just 2 per cent each year - but one in three expressesd some dissatisfaction with their bank charges, which are, on average £51 per month. The average SME has been with their main bank for 15 years. Seven per cent were considering changing banks, and 29 per cent said they would move if approached by another financial services provider.

William Sargent, the chairman of the Small Business Council, which advises government on SME needs, says most companies were deterred from switching banks because of the perceived cost: "You don't feel you will get the same deals or service elsewhere" he said. "Until one of the banks breaks ranks and competes agressively on price, you won't see much change." Joanna Elson, executive director at the British Bankers Association, said however, that it was much easier to switch bank accounts than many people thought, and blamed the lack of movement on inertia. "There is an awful lot of advertising about switching but … the business owner has to make the move." More on Business Loans.

The study shows the average amount outstanding on an SME's term loan as being £88,000. the median interest rate on such borrowing is about two percentage points over the banks' base rate, but there are significant variations according to the gender and ethnic origin of the business owner.

Women business owners pay 2.9 percentage points over the base rate, compared with 1.9 percentage points for men. Ethnic minority-owned businesses pay just 1.2 percentage points over the base rate, whereas white-owned companies pay 2.3 per cent, but the latter are rejected for loans just 11 per cent of the time, whereas the former are rejected 13 per cent of the time.

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