FD Index 2024: UK businesses scale back their borrowing and look to equity funding

UK companies are most likely to rely on equity funding or their own reserves to grow their businesses over the next year, according to research by Price Bailey. The nationwide survey of finance directors also found that businesses of all sizes are leaning towards a reduction, rather than an increase, in borrowing, which likely reflects the current high interest rate environment.

Cash is king

The UK economy is only expanding slowly, with growth of just 1.1% expected this year, according to the Organisation for Economic Co-operation and Development. Nevertheless, the research found that businesses are generally bullish about their prospects.

More than three-quarters (78%) of UK finance directors expect their company’s revenues to grow over the next 12 months. What’s more, 23% are forecasting a revenue increase of 40% or more. The largest businesses (those with over 500 employees) are the most optimistic about their ability to increase volumes and prices to hit their revenue goals.

While businesses are optimistic about their growth prospects, they are taking a cautious approach to funding that growth. Over half (52%) intend to raise equity funding to invest in innovation that boosts revenues and profits.

A similar amount of businesses (49%) plan to use the company’s cash reserves to help them hit their revenue and profit targets. This makes sense given that many UK businesses have substantial amounts of surplus cash sitting on their balance sheets. In fact, research by Allica Bank in 2023 found that UK SMEs were holding £273 billion in their bank accounts.

While the interest rate cycle appears to have peaked, interest rates remain high compared with their average over the past 15 years. So, it is not surprising that the research reveals an approximate 2:1 ratio of finance directors who anticipate a reduction in borrowing compared with those who anticipate an increase. In total, 28% of finance directors anticipate that their business will borrow less over the next 12 months, compared with 15% who believe it will borrow more.

What changes in your balance sheet, if any, do you expect to see over the next 12 months?

North-South divide

The research highlights a divide between northern and southern businesses when it comes to funding growth. This divide mirrors the similar divide that exists between the two regions when it comes to businesses’ optimism about their ability to increase their prices as well as their volumes of products and services sold.

Over half (52%) of finance directors in the South intend to use the company’s cash reserves to fund their growth, compared with 42% of their peers in the North. Meanwhile, 24% of northern finance directors expect their business to increase its borrowing – in contrast with just 11% of their southern counterparts.

A high percentage of businesses in both regions are looking at equity raises to fund their growth. Nevertheless, northern businesses are more likely than southern businesses to go down this route (57% compared with 50%).

Notably, southern businesses are more likely to decrease their borrowing over the next year compared with northern businesses (30% compared with 23%). This is probably because they have a higher amount of surplus cash on their balance sheets. The research also found that southern businesses are far likelier than northern businesses (50% compared with 33%) to undertake a share buyback over the next 12 months. Again, this is probably because they are holding a lot of cash and are under pressure to return some of it to shareholders.

What changes to your balance sheet, if any, do you expect to see over the next 12 months?

Cautiously optimistic

Commenting on the research findings, Chand Chudasama, Partner in the Strategic Corporate Finance Team at Price Bailey, said:

“Funding business growth with equity makes sense if the returns and growth warrant it. In our experience, a business typically has to grow its value by 25% or more to attract external equity investors. Where it can’t attract those third-party investors, equity funding falls to the current shareholders who are then expected to put cash back into the business to fund growth. Some shareholders are up for this, others are not, and that is normally the litmus test for a growth mindset.

“Significantly, the research points to a couple of potential barriers to growth. It suggests, for example, that high financing costs are still acting as a disincentive to investment for some businesses. Also, there is a notable trend towards share buybacks – meaning money that could have funded growth is instead being used to return value to shareholders. This could indicate a lack of confidence in the UK’s business environment as shareholders look to extract value rather than reinvest. Alternatively, the trend may say more about capital tax expectations than business confidence, but the line is fine. Good, growing businesses, led by capable boards, shouldn’t let the tax tail wag the dog.

“The last couple of years have been challenging for many businesses and they are understandably cautious as a result. Notably, our research highlights a clear regional divide between northern and southern businesses in terms of their financial health.”

Chudasama added: “The Budget is an excellent opportunity for the Government to create a friendly policy environment for businesses right across the UK. This environment should equip them with the confidence and support to invest in innovation, create jobs, and grow their operations – to the benefit of our economy and society overall.”

About the research

The research was based on a survey of 750 finance directors working for UK businesses with turnover in the range of £10 million to £100 million. It was conducted by Censuswide, on behalf of Price Bailey, in August and September 2024. The North is defined as the North East, the North West, Yorkshire and the Humber, the East and West Midlands. The South is defined as the East of England, Greater London, the South East, and the South West.