By Daniel Hunter

The latest BDRC Continental SME Finance Monitor has shown that the current economic climate presents an increasing barrier to applying for finance.

The Monitor investigates the availability of external finance for the UK’s small and medium-sized enterprises (SMEs). The eight waves provide a robust picture of SME sentiment as well as the identification of trends around access to finance.

The latest wave includes interviews up to the end of Q1 2013. Key themes include:

The economic climate presents an increasing barrier to applying for finance

- In Q1 2013, 19% of SMEs met the definition of a ‘Future would-be seeker’ who would like to apply for finance but think it unlikely they will. Asked about the barriers to applying, 63% of ‘Future would-be seekers’ said they were reluctant to borrow in the current economic climate, up from 50% in Q4, and the highest level seen to date.

- Within this category, more SMEs in Q1 said that it was the performance of their own business, rather than of the economy more generally, that was the issue (mentioned by 23% of ‘Future would-be seekers’, up from 13% in Q4). The equivalent of 12% of all SMEs said they were reluctant to apply for external finance because of the current economic climate.

SMEs are also reporting lower use of external finance

- 39% of SMEs were using any external finance in Q1 2013, the lowest level recorded on the Monitor to date, and down from 50% in the equivalent quarter of 2012;

- Use of “core” banking products (loans, overdrafts and credit cards) has fallen from 40% to 32% of SMEs between Q1 2012 and Q1 2013;

- Based on their behaviour in the previous 12 months, three-quarters of SMEs (76%) met the definition of a ‘Happy non-seeker’ of external finance, the highest proportion to date (‘Happy non-seekers’ are those who have not applied for (more) external finance in the 12 months prior to interview, and say that nothing stopped them from doing so). Indeed, 41% of all SMEs can be described as ‘Permanent non-borrowers’, SMEs that do not use external finance, and show little inclination to do so in the future. The proportion of such businesses has increased steadily over time (having been 30% in Q1 2012).

Awareness of Funding for Lending has improved, but awareness of other initiatives is limited and unchanged

- 27% of SMEs in Q1 2013 were aware of the Funding for Lending Scheme (FLS), up from 24% in Q4 2012, and the highest awareness of the bank and Government initiatives tested;

- 18% of SMEs thought such schemes made it more likely they would apply for finance — the equivalent of around 820,000 SMEs;

- In Q1 2013, 52% of SMEs were aware of any of the bank and Government initiatives tested, unchanged from Q4 2012. Awareness varies by size, from 50% of 0 employee businesses to 70% of those with 50-249 employees, but has changed little over time;

- Awareness of the appeals process amongst those declined remains low. 15% of those declined for an overdraft and 9% of those declined for a loan said they were made aware of the appeals process by their bank. Very few of those that were aware had appealed, citing lack of time and a feeling that it would not change the outcome.

As seen in previous waves, most applicants are successful, but the ‘Perception Gap’ still exists

- 70% of all applications reported for new or renewed overdraft or loan facilities are successful, and this has remained consistent over time;

- Overdraft applications continue to be more likely to be successful than those for loans (For YEQ1 2013, 71% of overdraft applications and 59% of loan applications resulted in a facility);

- Looking forward, 15% of SMEs planned to apply for new or renewed finance in the three months after interview. This is in line with previous quarters, but once the ‘Permanent non-borrowers’ are excluded, 25% of remaining SMEs are planning to apply — one of the highest proportions seen on the Monitor to date;

- 40% of those planning to apply were confident that their bank would agree to their request, much lower than the actual success rates achieved. This ‘Perception Gap’ has now been seen over several waves, and amongst both those planning to renew an existing facility and those seeking new funds.

Certain types of SME remain less likely to be successful when applying for external finance

- The Monitor continues to record lower success rates for smaller (0-9 employees), younger SMEs, and those with a worse than average external risk rating. First time applicants remain the least likely to be successful (YEQ1 13, 38% of first time overdraft applicants and 41% of first time loan applicants were successful).

“The SME Finance Monitor now allows us really to understand the key trends and themes around SME access to finance, and to highlight where these are changing over time," Shiona Davies, Director at BDRC Continental, commented.

"Whilst we are seeing signs of SMEs retrenching in terms of their use of external finance and the increasing obstacle of the current economic climate for those wanting to seek finance, there are also some positive signs. Profitability and growth expectations are being maintained, and awareness of the Funding for Lending Scheme continues to grow, with a significant minority of SMEs saying it could encourage them to apply for finance.

"The Perception Gap between actual and imagined success rates continues to exist, and this gap might be narrowed if awareness of the current 70% overall success rate, and of the range of initiatives available to help SMEs, could be improved.”

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