Good signs on credit availability but cost still a concern

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Last week we were disappointed by data suggesting that on a pro rata basis, the banks were falling short of their target of lending to SMEs agreed in February with the government under the so-called ‘Project Merlin'. That data related to 2011q1.

EEF's latest credit conditions survey, conducted in April and May, gives the first indications of credit conditions in 2011q2.

And as we have noted in the press, we are pleased that at last we have some good news on access to finance for SMEs in the UK. Our survey shows a net positive balance of companies reporting an increase in the availability of credit in 2011q2 – the first such positive balance since we started asking these questions in 2008q4.

Perhaps more important than this overall balance however, is that small companies in particular – those with up to 100 employees – are showing an even balance with as many small firms reporting an increase in availability as a decrease. This is a change as until now small firms balances for availability have been consistently negative.

Access to finance has until now been very much a two-sided story. Larger companies, which also happen to have more options available anyway, have consistently found it easier to access finance.

Smaller firms on the other hand have struggled. They rely on accessing credit through banks. Since the financial crisis banks have been less keen to lend to SMEs, at least partly because the banks needed to wind back their exposure after having over-extended themselves.

So an even balance for small firms is potentially a key breakthrough.

The next announcements to watch on credit conditions will be the Bank of England and BBA lending trends figures for April and May coming out in June.

But before we break open the champagne and pat the banks on the back, we need to recognise that the cost of credit continues to rise.

The availability of finance, on existing credit arrangements, shows a balance of -7.3% overall, falling to -13.3% for small firms in particular. This backs up what we hear from talking to firms that when they are refinancing with their bank, they're finding the costs and conditions tougher.

And further, unfortunately, 2011q2's survey showed a continuation of the trend in place over the course of the recovery, with a persistent balance of companies reporting an increase in the cost of credit.

This is virtually unchanged with a negative balance of 28.3% for all companies reporting an increase in the cost of new lines of borrowing, decreasing further to -30.2% for small companies.

The fact that some small companies must be entering their second round of refinancing since the financial crisis implies that margins are persistently lengthening from the finance providers.

The cost of finance issue, particularly if we consider costs outside of headline rates, is suggestive of the need for higher competition in the UK banking sector.

And despite the availability result, the two speed finance recovery between small and large firms continues, especially on cost; suggesting a greater variety of sources of finance is very much still a relevant concern for SMEs.

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