Fewer companies are seeing a rise in the cost of credit

Posted on 28 Aug 2012

The proportion of manufacturers experiencing rising costs of bank finance has fallen to 2007 levels, while EEF calls for government to push more choice in the credit market.

Britain’s manufacturers are seeing welcome movements in the cost of credit, with the balance of companies seeing an overall increase in the cost of borrowing falling to the lowest balance since 2007, according to the manufacturers’ organisation’s latest credit trends survey (This is the lowest figure in the history of the survey which began in Q3 2007)

But the survey also shows evidence that more companies are now turning away from financial providers altogether, choosing to rely on internal finance for investment.

Lee Hopley, chief economist at EEF, the manufacturers’ organisation, said: ‘It is a welcome sign that the stubbornly high number of companies seeing the overall cost of finance increase has fallen to the lowest level since the financial crisis…..  the fact this has coincided with the latest round of credit easing via the Funding for Lending Scheme offers hope that some impact is being achieved.

“However, there are still more companies saying the cost of finance is going up rather than down. With the short-term demand outlook looking very challenging, we simply cannot afford to have factors that are at least partly in the UK’s control holding back desperately needed investment.”

Key findings of the survey

Balance of companies seeing an increase in the overall cost of credit falls to lowest level since 2007

  • Lower balance of companies reporting a rise in the cost of new borrowing
  • Improved responses on fees and rates on existing borrowing
  • Responses on availability of credit remain broadly stable
  • But signs of more firms opting out of external finance altogether

The survey shows the balance of companies seeing an increase in the cost of credit has fallen to 11.2% from 21.2% in Q2. This coincides with the launch of several government credit easing’ programmes, the latest being the Funding for Lending Scheme which is designed to lower the cost of credit for SMEs looking to borrow whilst incentivising banks to increase their lending.

While there are still more companies saying the cost of finance is going up rather than down, with considerable strain on wholesale funding costs for banks, EEF says it is a positive sign that the balance of companies reporting an increase in the cost of new lines of borrowing decline to 8.5% (from 13.2% in the second quarter).

The balances of companies reporting increases in interest rates and fees on existing borrowing also improved, with the balances of companies reporting increases the smallest since the survey began.

Asked on BBC Radio Five Live whether it is simply the case that banks lend to companies with lots of  money but not to those with no money, Hopley said: “The evidence is more patchy than one would need to say that is the case.”

But there is evidence that demand for bank lending is weak. Robin Johnson, chair of the industrial engineering group and partner at international law firm Eversheds, said that a big focus on ‘lean’ in recent years has driven leaner – or smarter – cash management, reducing the need for bank borrowing.

“[Manufacturers] have taken advantage of low interest rates to manage treasury operations leanly and focussed even more on cost of capital. Larger multinationals have introduced sophisticated cash pooling and SMEs have focussed on cash collection and credit terms,” says Johnson.

“As things start to improve, notwithstanding negative macroeconomic matters still overshadowing global business, those lean companies are ready to benefit from any upturn. As regards funding lines, anecdotally there still seems to be some reluctance from “traditional” banks to lend and specifically asset based lenders seem in short supply or are offering terms that are not easy to turn into funding opportunities.”