SMALL and medium sized enterprises are overlooking business loans in favour of costly credit facilities to solve short-term cash flow, the Association of Chartered Certified Accountants has found.

Credit facilities include hire purchase schemes, personal credit cards, second mortgages and factoring, which, in return for a percentage of the debts collected, provides instant capital while the factoring firms chases money which is owed.

Richard Houghton, ACCA's spokesman for the south west, said: "Many small business owners avoid approaching their banks for loans when they hit cash flow problems for fear of being 'brought in for a chat' by their bank managers.

"They choose instead to use a combination of less formal methods of raising capital, such as hire purchase schemes, personal credit cards, home re-mortgaging and even borrowing from friends and family. This approach can be counterproductive in the long term.

"Consumer credit facilitators tend to charge higher rates of interest than business creditors. Opting to re-mortgage the family home involves a level of personal risk which would not present itself with an unsecured bank loan.

"And factoring is better suited to businesses which would otherwise spend an unfeasible amount of time retrieving outstanding payments."