By Daniel Hunter

The second quarter of 2012 has seen some improvement in credit conditions for Britain’s manufacturers according to a major survey published the EEF, the manufacturers’ organisation, with the availability of finance increasing for more companies over the past two months.

However, this is still coming at a price as fees on existing borrowing seem to be driving more companies to report a higher cost of credit.

EEF’s Q2 Credit Conditions Survey shows improvements across several measures of the availability of finance. A stronger balance of companies (4.3%) reported improved availability of new lines of borrowing over the past two months.

Encouragingly a positive balance of companies (+1%) reported improved availability of credit on existing arrangements, the first time this question has produced a positive balance since the survey began in 2007.

However, the balance of companies reporting an increase in the overall cost of credit still remains in firmly negative territory and has worsened since 2012q1 to 21.2%. This appears to be driven by fees and other costs on lending with a higher balance of companies (16.2%) reporting higher fees on existing borrowing.

At the end of the last quarter the government launched its National Loan Guarantee Scheme, designed to lower the interest rate on loans faced by companies looking to borrow. This does not yet appear to be having a major impact on cost as reported by manufacturers — a balance of 13.2% of companies still report the cost of new lines of borrowing has gone up, though this is down from a balance of 14.9% last quarter.

However, EEF stressed that it is still early days and it is critical that no momentum is lost in promoting this important scheme to SMEs.

“A greater improvement in the availability of credit after tentative signs of improvement at the start of the year is welcome, especially on existing terms as changes in these are often a point of sore contention amongst SMEs," EEF Chief Economist, Ms Lee Hopley, said.

“Increasing costs however remain a frustration, particularly the proportion of companies reporting higher fees. This is arguably the part of the cost of finance that is least impacted by tight wholesale funding markets.

“The coming months are challenging enough for firms contemplating investment in the face of uncertain demand. Our financial sector needs to be as dynamic and as competitive as possible to support these companies.”

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