Tempting manufacturers back to bank lending

Posted on 1 Sep 2016 by The Manufacturer

The EU referendum has placed access to finance firmly back on the table. Terry Scuoler reflects on what would tempt manufacturers back to bank lending.

Terry Scuoler, CEO, EEF
Terry Scuoler, CEO, EEF.

SMEs are familiar with anxiety toward access to finance. EEF’s latest results show that manufacturers are still reluctant to access bank finance nearly a decade on from the 2008/09 financial crisis, with almost a third fewer manufacturers more likely to use external finance than two years ago.

This comes despite manufacturers planning to invest and the availability of more affordable credit after seven years of historically low interest rates. Such reluctance is also not because manufacturers think they can’t get credit, with two-thirds confident they would secure bank finance if they needed it.

If manufacturers are so confident and have solid plans to invest in their business, it therefore begs the question as to why they are shunning bank lending, as well as how are they funding their investment plans?

Firstly, evidence suggests companies remain disengaged from the banking sector, with the legacy of the financial crisis still playing a significant role. The absence of product diversity, small differences in price, lack of transparency and poor banking relationships have also been cited as important factors.

This has made manufacturers wary of leveraging their business with bank debt or relying on products such as overdrafts for working capital.

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Manufacturers have built up cash reserves to finance investment internally.

Secondly, manufacturers have built up cash reserves to finance investment internally. In 2016, more than half of manufactures agreed they are holding more cash on their balance sheet compared to 42% in 2014.

Worryingly, over half of manufacturers suggested that they will postpone or cancel investment if they cannot fund from internal resources.

So, what would tempt manufacturers back to bank lending?

More than half have said that manufacturing-specific expertise and more competitive prices are important factors when choosing their main bank. Almost two-thirds also say that an easier switching process could prompt them to search for a better deal.

The type of financial products manufacturers are mor likely to consider is also a useful guide for banks looking to attract their businesses. Manufacturers are still more likely to use ‘traditional’ finance products, such as medium-term debt (64%), asset finance (56%) and overdrafts (50%).

Business Meeting Servitization
Manufacturers are reluctant to give up a stake of their business to secure funding through equity finance.

On the other hand, alternative finance products are low down the rankings (19%), along with equity finance (30%), with manufacturers reluctant to give up a stake of their business to secure funding.

Despite considerable improvement in recent years, the situation remains challenging and the new government should demonstrate its commitment and support to business.

This support will be even more important given that the Brexit vote is likely to further aggravate existing competition failings in the financial sector. Uncertainty about economic growth dampening businesses investment plans will not help either.

The Competition and Markets Authority’s (CMA) recommendations in terms of switching and transparency are timely, and a decisive step towards improving supply-side dynamics in access to finance for UK SMEs.

Looking forward, swift implementation of the CMA’s recommendations will be key in offsetting some of the negative impact of the Brexit vote on credit conditions, as well as making sure the financial sector is fit for the future.