A quarter of small businesses struggling to raise cash – but few need it for growth. Finance for medium sized firms critical for jobs growth – but so is demand

Bootstrapping seemed to predominate among respondents. For example, 57% said they have had to use personal funds to help free up some cash for their business, 17% said they have borrowed off family and friends and 16% said they have used personal assets, such as their house, to secure finance for their businesses.

Despite schemes to persuade banks to lend, 66% said they lack confidence in their bank and that they are unsure whether it will lend to them. And while 19% said that over the past year, they applied for a bank loan, of them, fewer than a third secured the finance they were hoping for in full.

These outcomes are slightly more understandable when considering the reasons people are trying to borrow: while nearly half said they were applying for a loan because of cashflow issues and just over a third said it was because of late payment (both evidence of the recession), 25% said they needed the money to pay tax bills and 17% said it was to pay wages, neither of which attract banks or indeed the government.

Only 17% said borrowing was to develop new products and services which might help growth or rebalancing of the UK economy.

Meanwhile, the CBI is calling for a broader range of finance to be made available to medium-sized businesses (MSBs). With banks' lending constrained, these firms can no longer rely solely on bank lending for long-term growth capital to invest in their companies. The skills and motivations of business owners and managers will be crucial to unlocking MSBs' full potential so the CBI makes a series of recommendations for building their capabilities and inspiring them to strive for even greater growth. The CBI report called Future Champions: unlocking growth in the UK's medium-sized businesses, uses new analysis conducted with the help of McKinsey & Company.

Firms with a turnover of between £10 million and £100 million represent less than 1% of businesses but generate 22% of economic revenue and 16% of all jobs. These firms have a high propensity to export, innovate and generate growth. Figures provided to the CBI by NESTA reveal that just 6% of MSBs create 60% of all the new jobs created by the sector. If more firms could reach their potential to grow, this could help achieve an extra £20bn to £50bn by 2020, a major boost to the UK's GDP.

Many MSBs operate in sectors with high productivity growth and if MSBs had been able to raise their productivity between 2002 and 2007 as much as large firms operating in the same sectors, their annual rate of productivity growth would have been one per cent higher than the large firms.

The contribution MSBs make to the UK economy is smaller than in France and Germany, where they contribute a greater share of total revenue and generate a significantly higher proportion of jobs. This may explain why the government is researching growth motivation at present.

To achieve extra growth, medium-sized firms must have access to new kinds of finance. This means opening UK bond markets to medium-sized businesses, encouraging use of venture capital, and making it easier for large companies to invest in medium ones, possibly in their supply chains.

MSBs could play a crucial role in rebalancing the economy, and create new jobs in areas most affected by public spending cuts. In the North East, where unemployment reached 11.3% in the three months to August 2011, MSBs already account for about 20% of all jobs. Mid-sized firms also represent 30% of the UK's manufacturing base.

In a effort to increase lending to SMEs, in November RBS promised to cut upfront fees, lower lending rates and end early repayment penalties as part of ‘a drive to get behind the economic recovery’. Under this new initiative, a business borrowing £75,000 - the average small business loan - would save as much as 60% on the cost of the loan over three years.

But is this a case of too little too late? Project Merlin has proved only a partial success, lending £39.5m in the first half of 2011 out of an earmarked £76m to small businesses. But it has hardly prompted boom times for SMEs where the consensus seems to be ‘sod the banks, we’re bootstrapping’.

Economic growth in the UK has already stalled. Businesses have hunkered down for a long financial winter as NIESR cut it growth forecast to 0.8% and suggested the probability of a double dip recession was now 70%. The volatility of the markets is creating huge risks as well as opportunities for expanding firms. And the CBI's latest quarterly SME Trends Survey published in November showed that firms believe demand will remain flat in the coming quarter and they anticipate a small fall in production.

Of the 412 respondents, 27% said that domestic orders rose in the three months to October and 27% said that they fell - the resulting balance of 0% was the lowest since January 2010 (-10%). Over the same period export orders fell (-8%) for the first time since October 2009 (-13%) . In line with expectations of stagnant orders and falling stocks, manufacturers expect output to fall slightly over the coming quarter (-4%), following modest growth in the three months to October (+6%).