Growth prospects improve - time to get the finance flowing

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Hot on the heels of our own Credit Conditions Survey issued earlier this week is today's BDRC Continental SME Finance Monitor covering 2013q2. This survey, which covers firms across the economy, is funded by the major UK banks and involves interviewing 5,000 companies per quarter on a multitude of aspects of access to finance.

There is some heartening news to take out of the latest Monitor:

The proportion of SMEs reporting growth over the past 12 months increased from 39% in the first quarter to 44% this quarter;

The proportion of SMEs planning growth over the next 12 months increased from 48% to 51%; and

Awareness of the flagship government/Bank of England Funding for Lending Scheme designed to boost lending to SMEs and mortgages was higher than any other access to finance initiative (from either the government or the banks).

This is good news as the UK continues to search for an elusive rebound in business investment, still languishing 25% below its pre-recession peak.

The bad news is that for the 51% of companies that are planning to grow, 14% see access to finance as a major barrier to running their business over the next 12 months - compared with only 7% of companies that do not plan to grow seeing finance as a major barrier.

With an SME population of over four million, it's no exaggeration to say that hundreds of thousands of firms see access to finance as a major barrier.

So what can be done to improve the situation for firms? Our recipe would consist of a combination of boosting competition in the banking sector, increasing alternative sources of finance, improving real business understanding in the financial sector, and lifting customer communication and service.

To be fair to the major UK banks, they have made a number of commitments that have targeted the last two. From late 2010, the banks have offered an appeals service to anyone who is denied a loan, instituted a signposting service to alternative sources of finance where these are more appropriate, and supported a network of business mentors amongst a host of 'business finance' commitments they made.

Unfortunately, as successive Monitors have pointed out few companies report being made aware of these initiatives. For example on lending appeals, just 7% of companies denied a loan in the past 18 months report being made aware of the process - despite the fact that roughly 40% of original decisions are over-turned on appeal.

So there needs to be a much more energetic and consistent implementation of these commitments by banks across the country. It's telling that the much younger FLS is known by 29% of firms while only 12% of firms have heard of the lending appeals process.

On getting more diversity, choice, and competition within the banking system and beyond it we continue to push the government to look harder at the banking system. This isn't about attacking the City of London at all - this is about looking at how our domestic banking system is serving the real economy.

With the collapse of the Co-Op's plans to buy branches from Lloyds, the government lacks a credible central strand to its stated ambition to introduce more competition on the high street. We need an urgent review of what more can be done to increase competition. We're not starting from scratch here and can draw on many previous studies that have suggested the government act for example by improving consumer comparison information, making better use of shared branch infrastructure, and making it easier for new banks to set themselves up.

We also think given the long-observed reluctance amongst firms to switch banks, that the government should consider offering a time-limited, capped incentive that matched any savings firms could make by switching banks. Hopefully this would jolt firms into a more active consideration of switching - but at worst it would give a one-off targetted tax cut for SMEs that have enough nous to search out a better deal.

This review should also include a frank consideration of whether even with some marginal additional initiatives whether the UK market is simply too concentrated (85% of the market is held by four banking groups). Perhaps it is time for a referral to competition authorities.

We also think that the Business Bank, while it has some worthy aims currently of increasing alternative finance suppliers, should be refocused in the short to medium run to boost banking competition. It's not that alternative sources aren't important, it's more that for the forseeable future, the main source of external finance for SMEs will be banks and this area needs attention.

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Media Team 020 7654 1576

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