Lending improves but fewer firms say FLS encourages borrowing

Posted on 29 Aug 2013

Lending conditions to SMEs are improving as more overdraft applications are approved and more external finance such as leasing is being used now than in Q1, the SME Finance Monitor reveals.

Growth appears to be driving better credit conditions for small and medium-sized firms, as 44% of all SMEs reported that they had grown in the past 12 months, up from 39% in Q1 2013, the annual survey of 5,000 companies shows.

Seven out of 10 loan and overdraft applications reported to date have resulted in a facility. Analysis by the researchers, BDRC Continental, suggests that unlike 2011, applications made in 2012 were more likely to be successful than the profile of applicants would predict.

The popularity of external finance, such as leasing or invoice discounting, is increasing with 21% of SMEs reporting such use this quarter compared with 15% in Q1.

Awareness of the Funding for Lending scheme increased, but in Q2 fewer SMEs said that such schemes encouraged them to apply for finance.

But confidence that their bank would agree to their borrowing request fell from 40% of future applicants in Q1 to 30% in Q2, due to lower confidence among smaller applicants.

The increase in lending is stronger for overdraft applications, while evidence of banks loans increasing in Q2 is patchy and remains broadly flat.

Of overdraft applications made in the last 18 months, 57% were offered and accepted the facility they wanted and a further 14% had an overdraft after issues. The equivalent figures for loans applied for in the previous 18 months were 45% of applicants being receiving the facility they wanted while a further 13% had a loan after issues.

Despite the ease in credit conditions, 26% of overdraft applications and 34% of loan applications made in the past 18 month s resulted in no facility, and this remained more likely to be the case for younger businesses, those with a worse than average risk rating and those looking to borrow for the first time.

Ten per cent of SMEs in Q2 self-reported a credit issue such as a bounced cheque, the lowest level seen to date.

Among those initially declined a facility, awareness of the appeals process remained low (just 7% for those initially declined for a loan), with most rating the advice their bank offered as poor (70% for declined overdrafts, 62%
for declined loans).

Awareness of the Funding for Lending scheme increased from 23% to 29% overall, for the three quarters of the survey for which data is available.

The proportion of SMEs with a ‘worse than average’ external risk rating has increased slightly over time, to 56% in Q2 2013, due to more smaller SMEs with 0-9 employees having such a rating.

“The Finance Monitor provides a bit more evidence that Funding for Lending may be starting to impact, with awareness increasing and raising interest amongst SMEs to borrow,” said EEF’s economist Andrew Johnson. “But, while conditions are improving the job of ensuring the banking sector is ready to support companies’ investment plans is far from done.
“For one in seven companies with plans to grow access to finance remains a problem,” he added.

Phil Orford MBE, CEO of the Forum for Private Business said, “Businesses also need to have access to more information about the current finance support schemes, more comprehensive advice on the alternatives available and easier access to the appeals process when an application fails.

“What is required is an absolute focus on stimulating further economic activity and growth. My message to businesses seeking finance is to go for it. Seek out a mixed portfolio of options and appeal if you feel you’ve been unfairly declined.