By Marcus Leach

BDRC Continental has published the first of its independent studies into the availability of finance for the UK’s small and medium-sized enterprises (SMEs).

The eagerly anticipated report is the first edition of the quarterly SME Finance Monitor. The research has been commissioned by the Business Finance Taskforce and will be the largest and most frequent study of its kind in the UK.

The findings are based on over 5,000 telephone interviews conducted amongst UK businesses with up to £25 million turnover between March and June 2011.

Key highlights include:

- Not all SMEs use external funding. Half (51%) of SMEs are using external finance, rising to 81% of those with 50-249 employees.

- However, most requests are agreed. 72% of overdraft applicants and 59% of loan applicants got what they wanted straight away.

- Certain types of SME were less likely to be offered what they wanted, including smaller SMEs, those seeking new funds as opposed to renewing, SMEs less than 10 years old, and those with a worse than average external risk rating.

- Is there an unmet need for finance? 15% of all SMEs can be described as “unrequited” — that is, in the past 12 months they had wanted to apply for funding but had not done so.

- Looking ahead, one in five SMEs plan to apply for or renew facilities in the next three months. 63% of SMEs felt no need to apply. Almost one in five (18%) think they will be unrequited in the next three months, with the current economic climate being the main barrier to borrowing.

Half (51%) of SMEs are using external finance, rising to 81% of those with 50-249 employees.

One in six SMEs (15%) have applied for a new facility or renewed an existing one in the past 12 months. Of these, 72% of overdraft applicants were initially offered the facility they had requested, compared to 59% of those applying for a loan. At the end of the process, most applicants had a facility: 85% of overdraft applicants and 66% of loan applicants.

Certain types of SME were less likely to be offered what they wanted
Shiona Davies, the Director at BDRC Continental who led the research says, “The research shows that most applicants were successful, but that there are certain SMEs that were less likely to get facilities.

“Bigger SMEs are more likely to be offered what they want. For overdrafts, 83% of applicants with 10-249 employees got what they wanted straight away against 71% of those with nine or fewer employees. Loans showed a similar pattern: 69% of applicants with 10-249 employees were initially successful compared to 58% of those with nine or less employees.

“It is easier to renew existing facilities than to obtain new funds. Almost all of those renewing an overdraft facility were offered what they wanted (90%), compared to less than half of those applying for a new overdraft facility (43%). There is a similar outcome for loans, with 79% of loan renewals resulting in an offer of the facility requested, compared to 51% of new loan requests.

Younger SMEs were more likely to be initially refused financing. 83% of overdraft applicants from businesses aged more than ten years old were offered what they wanted compared to 54% of those under a decade old. For loan applicants, 70% of those 10 years or older were offered what they wanted, compared to 44% of SMEs that had been trading for less than a decade.”

Applicants with a worse than average external risk rating were more likely to be turned down. 22% of overdraft applicants with a worse than average risk rating were initially declined, compared to 3% of applicants with a minimum/low external risk rating. For loans, the equivalent figures were 45% (worse than average risk) and 5% (minimum/low risk).

Is there an unmet need for finance?

15% of all SMEs can be described as “unrequited”, that is in the past 12 months they had wanted to apply for funding but had not done so. Each unrequited SME mentioned a range of reasons for not approaching a bank. The four key themes were:

1. The current economic climate — “it’s not the right time for my business”. 22% of unrequited overdraft applicants and 31% of unrequited loan applicants mentioned this.
2. Discouragement — either direct, after making an informal enquiry at the bank, or indirect, because they expected to be refused. One in three would-be overdraft applicants (34%) and more than half of all would-be loan applicants (54%) felt discouraged. This is the equivalent of 6% of all SMEs reporting that they felt discouraged.
3. The process of borrowing — for example the cost and time involved (57% of unrequited overdraft applicants, 58% of unrequited loan applicants mentioned such issues).
4. The principle of borrowing — for example due to a fear of losing control of their business (60% of unrequited overdraft applicants, 55% of unrequited loan applicants mentioned such issues).

Half of those who wished that they had applied for an overdraft and two thirds of those that wished they had applied for a loan said that the decision not to apply had impacted on the business.

Looking ahead: SMEs’ need for external finance for the next three months
One in five SMEs (19%) plan to apply for new or to renew existing facilities in the next three months but they are less confident that the bank will say yes than applicants in the past 12 months. 63% of SMEs have no plans to apply or renew, nor do they feel the need to apply. In contrast to these “happy non-seekers”, almost one fifth of SMEs (18%) think that they will be “unrequited” in the next three months (i.e. they will want to apply for finance but feel unable to). These unrequited SMEs see the current economic climate as the main barrier to borrowing.

Shiona Davies, Director at BDRC Continental, said: “The debate about SMEs and banks is extremely complex. This report focuses on bringing out the evidence that will be vital for Government, banks and commerce to ensure that the backbone of the British economy has the support it needs to drive growth.”

Join us on
Follow @freshbusiness