Shifting mainstream credit

Posted on 20 Sep 2010 by The Manufacturer

A new study has found that two-thirds of UK firms expect credit costs to rise in 2010, fuelling interest in alternative finance.

The report by Siemens Financial Services (SFS), due to be released on September 27, shows 65% of companies in the UK (52% DE, 47% FR) expect the cost of credit to rise in 2010. Credit availability also remains tight, with predictions of further credit limit reductions in 2010 by 49% of UK companies (34% DE, 45% FR).

Bank credit is expected to become more restricted and expensive throughout 2010. The research indicates that, to overcome the corporate credit squeeze, UK business are showing an increasing and long term interest in alternative finance solutions, remaining at around double the rate seen in 2008. In 2010, 53% of UK, German and French companies are actively exploring financing methods outside of traditional lines of bank credit.

According to David Martin, Head of Sales, Siemens Financial Services UK, increased lending costs and scarcity of credit will continue throughout 2010. “Volatility in world markets, the experience of a recent severe downturn and the uncertainty of when or how fast economic recovery will occur, may be highly influential on this maintained level of interest in asset finance,” he says. “It is clear that businesses’ financial mindset is evolving in the current economic climate, with proactive consideration of financial alternatives.”

Between November 2009 and June 2010, SFS surveyed 3,250 companies in the UK, France, Germany, Poland and China. In Europe, it appears that the worst may be over. The overall proportion of European firms experiencing a rise in the cost of credit has fallen, in line with ECB and Bank of England indications.

The evidence-based future outlook for borrowing costs – where the bank has already indicated that costs will rise – follows the same pattern. In France, the number of companies experiencing a rise in the cost of credit remains broadly level in comparison to the previous two years as reported by around 35% of companies.

Interestingly, in contrast with actual experience so far this year, predictions of the cost of credit for the remainder of 2010 reveals forthcoming pressure on companies in all the geographies studied. The UK shows a slight fall from its 2009 peak (74%), but still remains highest among the three Western European countries at 65% (47% FR, 52% DE). Evidently, in all three countries, credit availability remains tight and is likely to do so for some time to come. Expectations of further credit limit reductions confirmed this, with a higher proportion of UK Companies (49%) expecting caps in 2010 than either German (34%) or French (45%) firms.

The results suggest that the limited availability of credit is prompting companies to search for other sources of financing, firstly to align costs to outputs/earnings and secondly, to have sufficient access to working capital to take advantage of the economic upturn. Specifically looking at asset finance techniques, such as leasing, 35% of companies in the UK , (FR 41%, DE 40%) expect their usage to rise in 2010 – almost three times the levels researched in 2008.