Small and medium-sized businesses in Swindon are increasingly overlooking business loans in favour of costly credit facilities to solve short-term cash flow problems, says Richard Houghton, South West spokesman for the Association of Chartered Certified Accountants.

According to Mr Houghton, alternative credit facilities include hire purchase schemes, personal credit cards and second mortgages, even borrowing from friends and family.

Many SMEs are also choosing to employ factoring firms which, in return for a percentage of the debts collected, provide them with instant capital while the factoring firm chases money which is owed.

Said Mr Houghton: "SMEs need to think carefully about which credit systems will be of most benefit to them in the long term and which will, therefore, extend the life-cycle of their businesses.

Many small business owners purposely 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."

However, as he pointed out: "This approach can be counter-productive in the long term. Consumer credit facilitators tend to charge proportionately higher rates of interest than business creditors and are, therefore, more expensive.

"Furthermore, opting to re-mortgage the family home in order, for example, to release the equity in the property inevitably involves a level of personal risk which would not present itself with an unsecured bank loan."

Mr Houghton was also dubious about the benefits of using factoring firms, claiming that the service was better suited to those businesses that would otherwise spend an unfeasible amount of time retrieving outstanding payments.

His view was echoed by Dennis Grant, Chief Executive of Swindon Chamber.

"Evidence clearly exists among my membership that dubious practices are being adopted which are not advisable, like second mortgages and credit borrowing being used to support businesses in difficulties," he said.

"Not only are these practices setting a bad precedence but they could also endanger the viability of the business. Credit lines for business must be secured only from appropriate organisations geared to deal with the needs of businesses."