By Daniel Hunter

BDRC Continental today (Wednesday) published the fifth quarterly SME Finance Monitor which investigates the availability of external finance for the UK’s small and medium-sized enterprises (SMEs).

The findings suggest that profitability levels are stabilising amongst SMEs despite the continued tough trading environment.
Two thirds (65%) of those interviewed in the latest wave of the research had reported a profit in the last 12 months.

There are also signs that SMEs are focusing on better financial management: the number reporting a credit issue (i.e. bounced cheque, missed loan repayment) has dropped slightly since the equivalent period last year (from 15% to 13%).

The current economic climate continues to be seen as the main barrier to running a business (by 35% in Q2 2012). Amongst those ‘would-be seekers’ that have a need for external finance in the next three months that they do not expect to apply for, the economy also remains the main barrier to asking for funding — cited by 49% of these SMEs.

However, overall SMEs remain upbeat about the future, with almost half (47%) stating an objective to grow in the next 12 months. This is an increase from 44% in Q1-2 2011. The uplift is due to larger numbers of smaller businesses who plan to grow (increased from 41% to 46%).

Appetite for, and use of, external finance amongst SMEs has declined over time. In Q2 2012, 43% of SMEs interviewed said that they were currently using external finance, a decline of eight percentage points compared to the 51% in Q1-2 2011. The proportion of SMEs with an overdraft has dropped from almost a third (30%) to 22% in the same period, while the number with a loan has remained the same. Looking forward, in Q2 2012 14% of SMEs thought it likely they would apply for new or renewed funding in the next three months, down slightly from 16% in Q1 2012.

Where businesses have applied for external finance, in the 12 months prior to interview, most have been successful. 90% of loan and overdraft renewals have been successful, compared to 73% of applications for new money from businesses that have borrowed in the past. First time applicants for loans and overdrafts remain less likely to have been successful (43%).

For the first time in the research, SMEs were asked about using personal money to finance their businesses. 41% of all SMEs said they had injected their own money into their business during the past 12 months. A quarter of SME’s (25%) said they had taken this course of action because they had no choice, whilst 16% said they had chosen to self-fund to help the business grow.

Using personal finance was more common in businesses with less than 10 employees, newer firms, and those with poorer external risk ratings. For SMEs with less than 10 employees particularly, using their own money for finance was more likely to have been seen as a ‘necessity’ rather than ‘choice’.

Legislation and cash flow challenge more SMEs than access to external finance
Looking ahead, in Q2 2012, only one in ten (11%), of all SMEs cited access to external finance as a major obstacle to running their business — this figure is unchanged since Q1 2012. This becomes more of a concern for those businesses with any appetite for external finance in the next three months: 24% of these SMEs cite access to finance as an issue. Overall, apart from the economy (already mentioned), it is legislation and regulation, and cash flow/late payment - each rated at 14% - that are seen as bigger challenges than access to external finance.

Future ‘happy non-seekers’ (i.e. those who said they would not be applying to borrow in the next three months because they do not need to) remain the largest group of SMEs and account for almost two thirds of businesses (64% in Q2 2012, up from 60% in Q1 2012).

When asked about the impact of the National Loan Guarantee Scheme, 15% of all SMEs said that it would make them “more likely” to apply for one of the lending products offered at a discount rate, but most (65%) said it made no difference because they did not wish to take out one of these products.

“Future appetite for external finance remains muted - primarily by the current economic environment. Our data shows that even special measures, such as the NLGS, may only appeal to a minority of SMEs, many of whom say they currently have no need for (more) external finance," Shiona Davies, Director at BDRC Continental, said.

Key findings include:
- 11% of SMEs had applied for new loan or overdraft facilities in the 12 month period to Q2 2012. This figure has been stable since Q3 2011.

- 12% of SMEs in Q2 2012 reported the automatic renewal of an existing overdraft in the previous 12 months. This equates to around half of all SMEs with an overdraft facility.

- Three quarters (75%) of overdraft applications were successful. Once automatic renewals are included, this figure increases to nine out of ten applicants being successful. For loans the comparative figure was 59% successful.

- Those applying for new funds were less likely to be successful than those applying for a renewal of facilities (90%). Amongst applicants for new money, those applying for their first ever loan/overdraft were much less likely to be successful (43%), than those who had borrowed before (73%).

- 34% of all loan applications and 21% of all overdraft applications were declined (the equivalent of 2% and 1% respectively of all SMEs).

- A minority of those declined said that the bank had either offered an alternative form of funding, or pointed them towards alternative sources of finance (13% for overdrafts declined and 9% for loans), while around 7 out of 10 rated the advice offered at this stage as “poor”. A quarter of those declined said that they had not been given a reason for the decision.

- In Q2 2012, 14% of SMEs thought that they would apply for new or renewed funding in the next 3 months, down slightly from 16% in Q1.

- Confidence amongst these future applicants that the bank will agree to their request is now at the lowest level seen in this study, with 39% confident of success (compared to 52% in Q1 2012). This is due to declining confidence amongst SMEs with fewer than 10 employees (37% from 52%) as confidence amongst larger SMEs remained unchanged (60%).

- 22% were “future would-be seekers” of finance. A reluctance to borrow in the current climate remained the main barrier to application amongst this group, mentioned by 49% of such SMEs in Q2. Compared to 2011, more SMEs in 2012 have attributed this reluctance to the performance of their business specifically, rather than the economy in general (now 18% of future would-be seekers). ‘Discouragement’ is less of a barrier to future applications than it was for those in the past (14% in Q2), but was mentioned more by those future would-be seekers who had identified a specific need for finance (44%).

- In a new question for Q2, 14% of SMEs were aware of the National Loan Guarantee Scheme. 15% of all SMEs went on to say that it would make them “more likely” to apply for one of the lending products offered at a discount rate, while the majority, 65%, said it made no difference because they did not wish to take out one of these products.

- Just under half, 47%, of all SMEs were aware of any of the Taskforce initiatives, a figure that has remained virtually unchanged since Q3 2011.

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