The total amount borrowed by UK SME food producers hit a record high in 2015 at £1.72bn (2.19bn), according to the latest Companies House filings of almost 600 UK SME food producers.
SMEs were defined as companies with turnover of £25m or less.
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This figure was 30% higher than in 2010, when borrowing by SME food producers stood at £1.32bn.
According to independent UK finance provider LDF this was a result of more of these SMEs experiencing late payments from supermarkets and their need to invest in new equipment to stay competitive.
"Increased pressure on supermarkets over the last few years, following the growth of discount chains and escalating price wars, means that many are putting pressure on producers to lower prices, or imposing lengthened payment terms," wrote LDF.
The company added that increased borrowing may have also been driven by rising demand among consumers for natural and ‘artisanal’ foods – which tend to require higher cost ingredients, new factory fit-outs and other investment needed to overhaul production methods.
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By GlobalDataLDF said that whilst SME food producers have been benefitting from consumers’ willingness to ‘trade up’, a substantial capital outlay needs to be made to enable SMEs to switch production to higher margin products.
Peter Alderson, managing director at LDF, said: "Interest in ‘artisanal’ and hand-finished products has soared. Consumers are now placing more value on quality and traceability- meaning more expensive and locally or regionally-sourced ingredients are needed, as well as new factory fit-outs. New IT equipment is also often needed to improve traceability. Investment has gone up significantly as a result.
"Increased competition has also put the big supermarkets under strain- which means more are paying food producers late, or cancelling orders last-minute. Borrowing more can help deal with the cash flow difficulties created.
"All of this is particularly a problem for SMEs. Larger food producers often have greater leverage when it comes to negotiating prices and tackling payment issues with supermarkets. Smaller businesses tend to be more cautious about losing business- and therefore more reluctant to confront any breach of industry standards."
Alderson added: "These issues need not cause a major problem. Effective financial and cash flow management, including use of finance, can help to alleviate much of the pressure and prevent temporary strain from impacting on long-term plans for growth.
"Reviewing how resources and investment is managed on a company-wide basis is recommended at times like this.
"With many banks still unable to lend to smaller businesses, a lot of companies are now looking into how alternative and non-bank finance to help manage costs. Demand for these options has risen considerably over recent years."
