Finance needs to be at the heart of the UK's engine for growth

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The financial crisis and recession hit the UK hard. The recovery in output for the overall economy has been painfully slow. UK manufacturing has seen a stronger rebound but a lasting scar from the financial crisis is the fractious relationship between the manufacturing and the financial services sectors.

EEF's quarterly Credit Conditions Survey has consistently recorded a balance of companies reporting an increase in the cost of credit since the onset of the financial crisis, particularly in terms of costs outside of the headline interest rate. The Bank of England has slashed Bank Rate but margins to SMEs have widened considerably i.e. the full benefit of this reduction is not being passed through.

Business-bank acrimony is a discussion topic that doesn't seem to be going away. This week we had the final release for the Project Merlin agreement where the UK banks made available £215 billion in lending to UK private corporations (excluding other banks) in 2011. However, critics have pointed out the flow of net lending (gross lending extended by the banks less repayments made) to private non-financial corporations actually contracted by £9.6 billion in 2011.

And today the OFT appears set to turn up the heat on the UK banks.

Clearly there are both demand and supply factors at play. Companies are cautious about borrowing because of the economic climate. Many are understandably keen to pay down debt rather than take more on. But supply side factors, including cost and availability of finance, are not helping.

It seems like every second manufacturing SME around the country has a horror story to tell about how the financial sector – and banks in particular – was not supportive when their company needed them most. The result appears to be distrust.

Worryingly this distrust seems to be extending to the point that some SMEs are now choosing to opt out entirely of using external finance to support either their investment or their working capital. The proportion of EEF's member companies identifying no borrowing needs has steadily drifted up from the low 40s in 2009 to nearer to 50% in 2011q4.

We asked in 2010 how many of our members used only their own retained earnings to fund their expansion; at that time the proportion was 18%. I fear that this has now increased and cannot be positive for growth for the sector or the wider economy.

UK manufacturing needs a strong and supportive financial sector. At a time when the economy is in desperate need of strong business investment growth, the government and the financial sector need to be doing all that they can to relieve credit constraints on businesses looking to grow.

Remember that the government is relying on OBR forecasts of 7.7% growth in business investment this year to drive overall growth. In March 2011 they forecast 6.7% growth in business investment in 2011; that forecast has now been cut to -0.8%. We don't want a similar story in 12 months.

One of the avenues being pushed hard by the government and by the big banks through their Business Finance Taskforce is increasing the supply of alternative sources of finance outside of traditional bank products like overdrafts and term loans.

That's why at next month's National Manufacturing Conference there will be a workshop specifically looking at alternative sources of finance. The workshop will be an opportunity to showcase some of those alternative sources of finance that are gaining greater prominence with presentations on asset finance from Lombard, growth capital from the Business Growth Fund, and the suite of government-backed funds managed under Capital for Enterprise.

It will also present an opportunity for delegates to press a panel of experts on how they find out about sources of finance outside of traditional bank lending as well as putting out some challenges as to where the gaps remain. For more information about the workshop and our conference in general visit http://www.manufacturingconference.co.uk/

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