Finance costs rising, EEF lending survey shows

Posted on 14 Mar 2011 by The Manufacturer

In the past two months the availability of finance improved, but costs increased, according to a survey manufacturers’ organisation EEF has published today.

This is the first survey on bank lending to business being published since Project Merlin was announced last month.

It also found how SMEs in particular are those experiencing the most acute problems.

Having seen a slight fall in the proportion of companies reporting an increase in the cost of credit towards the end of last year, conditions have gone into reverse over the past two months. The balance of companies reporting an increase in the overall cost of credit jumped to 32% from 19% in the last quarter of 2010. This negates any positive news on the modest pick up in the balance of companies reporting increased availability of both new and existing lines of credit.

Separately the survey also shows that over a quarter of manufacturers expect their demand for external finance to increase in the next twelve months. Without a corresponding improvement in costs and fees on lending, EEF believes credit constraints will threaten to be a drag on growth and deter vitally needed business investment.

“The improvement we saw in lending towards the end of last year seems to have been short-lived,” said EEF chief economist Lee Hopley. “While there appears to have been some easing in availability, for many smaller companies the question is still ‘at what cost and under what terms and conditions?’. It is far from clear that, for small manufacturers in particular, we are on the path to easier access to more affordable finance. As a result there appears to remain a gap between the aspirations of Project Merlin and the reality on the ground.

“Until we start to see measurable progress on both cost and availability of credit, access to finance will remain the weak link in the government’s strategy for growth. This will require addressing the underlying issues of increasing competition in the banking sector and improving its understanding and relationship with industry.”

According to the survey, over a third of companies had seen a significant or moderate increase in the cost of new finance from banks or other lending providers in the first quarter of this year. Two thirds had seen no change, whilst just over 3% had seen a decrease.

The proportion of small companies seeing an increase in fees on existing borrowing went from 17% to 32%, with none reporting a decrease. By contrast, only 6% of large companies reported a rise in the past two months.

Peter Ewen, managing director of Venture Finance and chairman of the International Factors Group, commented: “In order for manufacturers to create the growth required, our advice would be to take stock of this changed finance landscape and realise that traditional credit finance won’t always be the answer. Going forwards, they need to explore a much wider menu of sustainable finance to fund working capital and growth in a way that provides true value for money.”