Slow improvement in lending for manufacturers as demand picks up

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Today we have released our latest Credit Conditions Monitor for 2012q4 looking at access to finance for UK manufacturing firms. There are some encouraging signs:

The availability of new lines of borrowing has increased for a positive balance of 3.5% of companies;

The balance of companies reporting an increase in the cost of new lines of borrowing has decreased (to 4.9% from 8.5% last quarter);

Availability of finance from parent companies has increased for a positive balance of 9.3% of companies.

But there are a couple of weaker signs too with the overall cost of credit increasing for a balance of 16.5% (compared with 11.2% last quarter) and the availability of finance on existing credit arrangements decreased for a balance of 8.2% of companies (compared with 3.0% last quarter).

The new lines of borrowing question in particular might have some people pointing to the HM Goverment/Bank of England 'Funding for Lending Scheme' designed to get the cost of borrowing down for businesses and households than what they might otherwise be at a time when banks are facing higher funding costs of their own.

I don't think we're yet in a position to draw that conclusion. Official stats from the Bank of England suggest net lending for companies is still in the doldrums and the patchy overall results for the FLS-participating institutions for Jul-Sep are probably focused on household lending (though the FLS stats don't explicitly break this down).

One positive from our survey is that some of the biggest improvements seem to be for small companies. Take the cost of new lines of borrowing:

% balance of small companies seeing an increase in the cost of new lines of borrowing

These are the companies that have found it toughest to access finance since the financial crisis, so this is encouraging.

Perhaps what's concerning though is how access to finance is squaring off with rising demand. We asked another question this time in our Credit Conditions Monitor about whether companies thought their demand for finance to support their investment plans in the year ahead was likely to increase, decrease, or remain the same. A net positive balance of 17% of companies said they expected demand to increase.

Yet at the same time we know from the BDRC Continental SME Finance Monitor that more and more companies are disengaging from external finance providers to support their investments, preferring to rely on internal resources instead. This can't be good for growth or investment.

Our view is that a major reason firms feel like this is that we lack enough choice and competition in access to finance for SMEs both within and outside the banking sector.

That's why we issued a report last month entitled Finance for Growth, which called for a focused review on how to get more competition between banks in the private sector (e.g. by introducing an explicit time-limited incentive to encourage firms to switch banks) and also suggested the government use its 'business bank' to create a retail challenger to compete on commercial terms with the dominant incumbent banks.

Our hope is that demand continues to build - to take advantage of this we think the goverment needs to act to make the access to finance landscape for SMEs in the UK more attractive.

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