Lending conditions for manufacturers stabilise

Posted on 30 Aug 2011 by The Manufacturer

Survey reveals better availability but still rising costs of bank finance, as EEF calls for greater competition ahead of Banking Commission report.

Lending conditions have begun to stabilise for Britain’s manufacturers, according to a survey released today by manufacturers’ organisation EEF.

The third quarter survey of access to finance and cost of credit comes ahead of next month’s report from the Independent Commission on Banking. EEF has used the results to call for greater competition among banks to improve business lending.

Fewer companies reported a moderate or significant increase in the cost of finance from the same survey in the second quarter (+17% from +25.3%). This has continued a steady decline since the recession. However, despite this there are still more companies reporting rising costs of lending than those reporting a decrease (+17% compared to +5%).

“The improvement in [credit] availability last quarter has now been accompanied by some easing in the numbers of firms facing a rise in the cost of finance,” said EEF’s chief economist Ms Lee Hopley. “There is clearly more finance available but the fact more companies are still reporting an increase in cost rather than a decrease suggests that firms are paying a price for it.”

In light of the growing uncertainty over the world economy, she added “this is the time we can least afford to add any further constraints through tight conditions on accessing finance.”

Availability of finance has also continued to show a gradual improvement with fewer companies reporting a decrease in availability of new lines of borrowing (+7% from +10.9%).

Summary of survey results:

• Fewer firms reporting increase in cost of borrowing
• More firms still reporting increase than decrease in cost
• Availability of credit slowly improving
• Fees and rates on existing lending show little improvement

Despite several positive signs, concerns still remain. In particular, the fees on existing lending show little improvement whilst the balance of companies that have seen the rates on existing borrowing go up has increased (+13.3% from + 12.8%). This is despite the Bank of England’s Monetary Policy Committee seemingly backing off any intention to increase Bank Rate from its record low of 0.5% in the short term.

In response, EEF urged the government to respond decisively to the forthcoming Independent Commission on Banking report by addressing the certain priorities such as encouraging stronger competition in the UK SME bank lending market and assessing impediments to lending for SMEs.

Ms Hopley added: “A lack of competition in the SME lending market is still keeping costs too high and preventing the flow of finance our growing companies need.”