Lending environment still has room for improvement

Two-thirds of SMEs considering external finance are put off by economic climate

Lending environment still has room for improvement


Whilst we may have narrowly avoided the dreaded triple-dip recession, it seems to have had little positive bearing on our SME’s attitudes to lending. In the eighth wave of its quarterly SME Finance Monitor, which investigates the availability of external finance for the UK’s SMEs, market research consultancy BDRC Continental has revealed that the economic climate still presents an increasing barrier to lending applications.

To give a flavour of where things stand, 19% of the SMEs interviewed by BDRC up until the end of Q1 2013 met the definition of a ‘future would-be seeker’ – those who would like to apply for finance but think it unlikely they will. When asked what was currently putting them off borrowing, 63% admitted they were reluctant to borrow given the current state of the economy, up from 50% in Q4 2013, and the highest level seen to date. Whilst 23% of these ‘future would-be seekers’ (up from 13% in Q4) admitted it was the performance of their own business, rather than of the economy more generally (12%), that was the issue, it is difficult not to think that a stronger economy would engender the conditions for business improvement. Nevertheless, it seems we could take some heart from the fact that less ‘future would-be seekers’ (12%, down from 17%) now assume that their bank won’t be inclined to lend – principal among reasons for ‘discouragement’.

Putting things in a bit more perspective, the proportion of SMEs using any form of external finance in Q1 2013 was 39%, down from 50% in the equivalent quarter of 2012. And the use of ‘core’ banking products (loans, overdrafts and credit cards) has fallen from 40% to 32% of SMEs between Q1 2012 and Q1 2013. Whilst this year-on-year drop is across all size bands, it is more marked for those with 0-9 employees with signs in Q1 2013 of increased use of external finance by SMEs with 10-249 employees.

BRDC goes on to report that based on their behaviour in the previous 12 months, three-quarters of SMEs (76%) met the definition of a ‘happy non-seeker’ of external finance, again the highest proportion to date. For those of you not familiar with the term, ‘happy non-seekers’ are those who have not applied for (more) external finance in the 12 months prior to interview, and say that nothing stopped them from doing so. And moreover, 41% of all SMEs can be described as ‘permanent non-borrowers’, SMEs that do not use external finance, and show little inclination to do so in the future. The proportion of such businesses has increased steadily over time, having been 30% in Q1 2012.

Now, something which we have identified as an on-going issue for SMEs over the past year is not so much the choice of lending options on offer, but the fact that not enough is being done to make out start-ups aware of the plethora available to them. Well, it may come as little surprise that given its recent extension, and the news coverage it attracted, the Funding for Lending Scheme (FLS) has worked its way into the conscious of more SMEs, with 27% registering an awareness, compared to 24% in Q4 2012. However, recognition of other initiatives remains limited and unchanged at 52%, so there is clearly scope for improvement here, and we would hope to see an increase in the proportion of SMEs (currently 18%) that think such schemes make an application for finance more likely.

Looking forward then, 15% of SMEs said they planned to apply for new or renewed finance in the three months after interview. This is in line with previous quarters, but once the ‘permanent non-borrowers’ are excluded, 25% of remaining SMEs are planning to apply, and 40% of those planning to apply were confident that their bank would agree to their request, much lower than the actual success rates achieved. Yet, 70% of all applications reported for a new or renewed overdraft or loan facilities are successful, and this has remained consistent over time

“Whilst we are seeing signs of SMEs retrenching in terms of their use of external finance and the increasing obstacle of the current economic climate for those wanting to seek finance, there are also some positive signs,” suggested Shiona Davies, director at BDRC Continental. “The ‘perception gap’ between actual and imagined success rates continues to exist, and this gap might be narrowed if awareness of the current 70% overall success rate, and of the range of initiatives available to help SMEs, could be improved.”

Given the economic uncertainty which continues to cloud the small business sphere, reports like this do at least give us some inclination of the way things are going. In that sense then, we guess it’s very much a case of ‘until next time, folks’… 

Adam Pescod
Adam Pescod

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