Overall demand for credit rises but are manufacturers opting out?

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Earlier this week we released our quarterly Credit Conditions Monitor, which looks at how the availability and cost of finance is changing for UK manufacturers.

This showed, encouragingly, that the availability of finance appears to be improving; including for the first time since our survey begain in 2007, the availabilty of finance on existing terms and conditions.

However a strong balance of companies (21%) are still saying the cost of finance is going up. This has risen from 2012q1 where the balance was 16%. The main driver of this deterioration appears to be fees and costs outside headline interest rates, which I personally think is a sign of weak competition in our SME bank lending market.

Today, the fourth installment of BDRC Continental's SME Finance Monitor has come out. Not too much fanfare these days, no press releases [update: there is a press release from BDRC but this is a step back from promotion of earlier editions of the SME Finance Monitor by interested stakeholders].

This is a big (5,000 companies), quarterly survey funded by - but independent of - the UK banks.

The SME Finance Monitor is a mine of information and greatly helps enrich the debate on access to finance. This is a debate that often become polarised between the financial community's view that banks aren't lending money because businesses don't want it (i.e. demand side factors) and some business groups that say the banks don't want to lend to SMEs because they're trying to shore up their own balance sheets but reducing their own borrowings to provide credit (i.e. supply side factors).

Of course, it's a bit of both.

But what this edition of the SME Finance Monitor shows does give some support that demand may be rising.

The overall appetite for new or renewed lending has risen from 2011q4 (16% of all SMEs v 14%).

The proportion of 'would-be seekers' of finance i.e. those who would like to borrow but aren't for some reason (e.g. discouraged by the response they think they might get from the banks) is up from 20% to 25%.

And still a fairly high number of companies that apply for a loan or an overdraft walk away with nothing (41% and 21% respectively).

But what's perhaps most concerning from the point of view of our sector is that manufacturers in particular seem to be disengaging with external finance providers.

The proportion of manufacturing companies having applied for a loan or overdraft in the past 12 months declined from 14% in 2011q1/q2 to just 7% in 2012q1.

Unfortunately I have heard this anecdotally too - companies saying they invest for the long term and can't rely on banks being there when they need them - and so instead relying solely on internal funds.

This is the sort of discouraged demand we definitely don't want; it holds back investment and growth.

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