Businesses are having to plunder profits or ask family and friends for cash when they need money to expand, a new survey says.
The Institute of Directors, which represents many privately-owned businesses, says more than half of its members are relying on their retained earnings for finance.
It says less than a third of firms are relying on banks as their main source of money, while 27 per cent of those surveyed have asked family or friends for money or used a credit card.
The IoD says that while smaller firms are often reluctant to borrow money from banks, a contraction in bank lending has also played a part in the problem, reflecting trends identified by the Bank of England earlier this year
Ron Lynch, the East Midlands Regional Director of the IoD, warned that the reluctance to borrow from banks could hold back growth.
He said: "For a number of reasons, even as economic conditions in the UK have improved, finance remains difficult to access for many businesses. Many firms have been forced to become more self-reliant, moving away from traditional sources of debt finance.
"However, this dependence on internal funding may have wider implications. A reluctance to take on debt is not inherently bad, but it could imply a lack of confidence and may be limiting the growth of smaller businesses. Without injections of external finance in the form of loans or equity, many will find it difficult to invest in growth, launch new products or services and scale up their operations.
"Instead, businesses are plugging the funding gap by raising money from family or friends, or putting business expenditure on personal credit cards. This suggests an underlying need for day-to-day finance and serious cash flow problems for many businesses."
Mr Lynch added: "It is encouraging to see alternative funding sources such as peer-to-peer lending and crowdfunding emerge to meet the needs of businesses. These markets seem set to experience rapid growth in the coming years. As they become more widely known and trusted as credible sources of finance, many businesses will increasingly turn to them as the right source of capital for their needs. This shows that, where markets are allowed to operate freely, solutions will be created to meet business lending needs."
