By Daniel Hunter
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 a major survey released by EEF, the manufacturers’ organisation.
This is the lowest figure in the history of the survey, which began in Q3 2007. However, the survey also shows increasing evidence that more companies are now turning away from financial providers altogether, choosing to rely on internal finance for investment.
"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," Ms Lee Hopley, Chief Economist at EEF, the manufacturers’ organisation, said.
"While it is still too early to draw definitive conclusions, 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.”
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 government launching a number of 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.
EEF also believes that whilst 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, it is also 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 2012q2).
Furthermore, 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.
Availability balances were fairly stable with some small negative balances in the availability of new lines of borrowing (-1.3%) and the availability of credit on existing terms (-3.0%). However, there was a small improvement in the balance of companies reporting improved availability of finance from parent companies, which crossed into positive territory (1.0%).
However, despite the improvement in cost balances, there are signs that some firms, particularly SMEs, are ‘opting out’ of accessing external finance with half of all sizes of firms now reporting as not needing to borrow. This has drifted up from the low 40s and is the equal highest proportion over the course of the survey. A slightly higher proportion of SMEs report themselves in this position (51.6%).
EEF added that the fact firms are turning away from external finance providers is supported by numerous anecdotes of firms holding onto cash to support their own working capital and investment. As a result, EEF believes if the government’s schemes promoting lower cost access to finance for SMEs are to succeed, they need companies disengaged from the financial sector who are funding investment solely with internal funds to return to financial providers to help support and accelerate investment.
“In particular, government must stop hiding behind Whitehall marketing bans and start aggressively challenging banks and other finance providers to show our SMEs what they’re prepared to offer under the new Funding for Lending Scheme. We need our credit-worthy firms to bring forward each and every investment that they are contemplating to help support growth," Lee Hopley added.
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