By Daniel Hunter

BDRC Continental today (Wednesday) publishes the sixth quarterly SME Finance Monitor which investigates the availability of external finance for the UK’s small and medium-sized enterprises (SMEs). The research is based on more than 30,000 interviews with SMEs, and findings date back to the start of 2010.

Over half (57%) of all SMEs neither use any external finance, nor have any immediate plans to do so — and this proportion has increased over time. In Q3 2012, 40% of SMEs reported using any form of external finance, the lowest levels reported in the SME Finance Monitor.

Use of ‘core banking products’ such as loans, overdrafts and credit cards also declined by five percentage points year-on-year (39% Q3 2011 down to 34% in Q3 2012). Over time there are more first time applicants who now account for a third of all applications for loans and overdrafts.

Of all applications reported to date to the SME Finance Monitor, 71% resulted in a loan or overdraft. A quarter, (23%) were declined — equivalent to 3% of all SMEs — and the remainder took other funding.

As we’ve seen in previous waves of the Monitor, overdraft applications continue to be more successful than loans, with smaller, newer businesses and those looking for funding for the first time the most likely to be declined by their bank. Amongst these first time applicant SMEs: 42% now have a facility, 7% have taken other funding, and 51% have no facility.

In Q3 2012, 12% of SMEs stated they planned to seek external finance in the next 12 months. A third (33%) of those planning to apply were confident that the bank would agree to their request. This is the lowest level seen to date in the survey — and notably below the current success rates for applications. A quarter (25%) of SMEs now meet the definition of a ‘future would-be seeker’ of finance (up from 22% in Q2 2012).

A reluctance to borrow in the current climate remains their main barrier (49%), and while ‘discouragement’ (16%) is less of a barrier, it is being mentioned more over time and particularly by the 3% of SMEs that have an identified need for finance.

The pressure of the challenging economic climate is starting to show, with profitability showing a downward trend of five percentage points (from 67% in Q1-2 2011 to 62% in Q3 2012). Other key indicators seen in the past 12 months of the Monitor include: more SMEs with a ‘worse than average’ external credit risk rating (up from 48% in Q1-2 2011 to 55% in Q3 2012); more holding smaller credit balances of £5000 or less (up from 63% in Q1-2 2011 to 70% in Q3 2012); and more using their overdraft facility regularly, and to 50% or more of the agreed limit.

Almost one half (44%) of SMEs interviewed between April and September 2012 had injected personal funds from the owner/directors in the previous 12 months. 18% had chosen to do so to fund growth, whilst 26% had felt they had no choice.

“There are clear signs that SMEs are under pressure, and that fewer of them are seeing external finance as an option for their business," Shiona Davies, Director at BDRC Continental, said.

"Some SMEs feel discouraged from applying, and their perception is that access to finance is becoming more of a barrier. This is despite the fact that 71% of applications have been successful since we began the Monitor, although first time applicants continue to find it more difficult to access finance.

“Although the banks and Government are undertaking various initiatives to boost lending, awareness of these hasn’t increased over the past 12 months. This suggests that communication and awareness raising activities could help to encourage SMEs.”

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