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More start-ups financing business from their own pockets

More small and medium sized enterprise (SME) owners are dipping into their personal savings to finance their businesses, research by the Federation of Small Businesses (FSB) has revealed.

Questioning more than 11,000 of its members, it found that 70 per cent of new businesses aged between one and two years old relied on funding from their owner's own savings and inheritance, whilst 34 per cent of owners borrowed money from friends and family. Only a quarter had access to a bank overdraft.

Even established SMEs were found to struggle in securing adequate finance, as the number of them using a loan or bank overdraft facility fell over the past two years. 35 per cent of these used an overdraft facility, while only 11 per cent used a secured bank loan, and seven per cent an unsecured bank loan - a drop of 8, 3, and 4 per cent respectively since 2009.

The research comes after targets for the Government's Merlin Project scheme - a commitment made last year between the state and five major UK banks to lend more to small businesses - were missed by £1.1 billion.

The figures from the FSB will sit alongside another report published by Bibby, which found that only four per cent of SMEs had applied for funding through Government initiatives, despite the Merlin banks stating they had met 'overall' lending targets. In fact, two thirds of UK business owners had not even applied for external funding over the past 12 months.

The FSB now wants to see more competition amongst high street banks and better promotion of alternative sources of funding available to small and developing firms. John Walker, the FSB's chairman, said: "Even though overall lending is above target, this shows that money is going to bigger businesses and not new and fledgling firms that need it to take advantage of growth opportunities that are there even in these challenging times.

"The Government also needs to put in place their bold credit easing plans, which will help small businesses access finance on better terms."