The latest edition of the bank-commissioned SME Finance Monitor covering 2012q4 is out today and it unfortunately shows that finance for SMEs continues to drift with disengagement growing even as finance is identified as a more important barrier to firms running their business.
Key findings from the Monitor this time include:
• 7% of SMEs – the equivalent of 318,000 firms – are ‘would-be seekers of finance' i.e. they would like to access finance but something is holding them back.
• Disengagement is rising with the percentage of SMEs saying they used external finance in the past but not now drifting up to 5% (from 3% in 2011q4);
• Very worryingly larger SMEs (which tend to be older and haver a lower risk rating – features associated with more success in applying for finance) appear to be using external finance less and less with 65% of firms with 10-49 employees reporting use of external finance (down from 70% in 2011q4) and 68% of firms with 50-249 employees reporting use of external finance (down from 75% in 2011q4);
• Discouragement and the process of borrowing (that includes the cost and security requirements associated with loans) were the main discouragements to borrowing.
• 24% of overdraft applicants end the process with no overdraft; 34% of loan applicants end the process with no loan.
• Awareness of bank-led initiatives to improve the relationship with SMEs remains low and static – with for example just 10% of declined overdraft or loan applicants being made aware of the banks' lending appeals process.
So we have a situation where hundreds of thousands of SMEs would borrow money but for some factor holding them back – that factor is very often discouragement (whether directly or indirectly) from finance providers or concerns about the costs and T&Cs on lending. These are factors that, unlike the external demand environment, can be influenced to increase the flow of net lending to SMEs.
The banks deserve some credit for committing to a number of actions to improve their relationship with SMEs. But making commitments is not an end in itself – we need these to start improving the relationship. The on-going woefully low levels of awareness of these actions means they are making little real difference on the ground. Fundamentally our view is that the SME banking sector is simply not competitive enough.
We need the government to take a hard look at the state of competition by immediately launching a review of further actions it could take to increase switching and bring forward new challengers. It should also think hard about how to focus its proposed Business Bank on the key issue of competition in SME banking.
In November 2012 EEF launched Finance for Growth – Increasing Competition in SME Banking, setting out proposals for improving SME access to bank finance. The report is available here:
The report proposes the following recommendations
o An immediate review should looking at options for increasing competition from private sector finance providers including
full account number portability
a switching incentive
lowering barriers to new entrants
lowering the costs of branch infrastructure, and
the merits of an earlier referral of SME banking to the Competition Commission.
o A study of the feasibility of a bank or network of regional banks part-capitalised by the public sector. A new challenger bank could be set up in competition with the big four banks using the £1 billion currently earmarked for a British Investment Bank. The government's capitalisation would be joined with investment from the private sector and potentially local government.
The resulting institution would not be state guaranteed or subsidised but instead aim to compete on commercial terms with the incumbents to drive higher competition in SME banking.