By Daniel Hunter

In contrast to the disappointing Funding for Lending results from the last quarter of 2012 released by the Bank of England earlier this month, this quarter’s Credit Conditions Survey from EEF, the manufacturers’ organisation suggests that conditions are gradually easing for UK manufacturers but that smaller firms are failing to see the full benefits.

According to the survey of almost 200 companies, availability balances were all positive for the first time in the survey’s history, although the positive balances for both the availability of finance from parent companies and the availability of new lines of borrowing both fell back from last quarter’s levels (both now stand at 1% from 9% and 4% respectively).

Cost remains a concern with still more companies reporting an increase rather than a decrease in the overall cost of credit. However, this balance has fallen to its lowest level since the start of EEF’s Credit Conditions Survey in 2007q3.

The balance of responses on the cost of new borrowing edged up in the past quarter (to 10% from 5% in 2012q4), but compares favourably with balances reported a year ago. Responses on the cost of existing credit arrangements were also encouraging.

However, the balances on responses from smaller companies remains more negative across all indicators. For example, on availability of new lines of borrowing the balance for small companies was zero and has been positive only once in the past year.

“The UK economy desperately needs finance flowing to every viable investment opportunity possible to support the growth our economy needs," Ms Lee Hopley, Chief Economist at EEF, the manufacturers’ organisation, said.

"This quarter’s Survey shows an encouraging further reduction in the balance of firms reporting an increase in the overall cost of credit and genuine improvement in the availability of credit. However, it also shows that smaller firms are failing to see the same benefits as larger firms.

“These results suggest there is an immediate case for strengthening the Funding for Lending Scheme and making SMEs more aware of it. But, in the long-run we ultimately need a much more diverse and dynamic finance landscape for SMEs. This means more competition between Banks lending to SMEs and more options outside of Banks.”

Ahead of the Budget EEF is calling for government to immediately launch a focused three month review of what more can be done to stimulate private competition in SME banking. This review should include but not be limited to:

- Consideration of providing an explicit, capped and time-limited incentive that matches any savings firms can secure from switching banks;

- Pushing the banks to move further than the redirection service they will introduce in September and move as soon as possible to full account number portability;

- Considering how new banks could make use of existing bank and government infrastructure to lower the set-up costs of establishing a branch network;

- Considering in the light of all current and additional actions whether SME banking should nonetheless be referred for investigation now to the Competition Commission.

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