SME Finance Monitor - Growth, Finance, the Future

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Our blog yesterday showed the economy is picking up. The upturn has become a bit more broad based across sectors and expenditure components, with trade and investment both positively contributing to growth.

There is inevitably the question of whether better balanced growth is here to stay. For investment, the outlook for lending will be a determinant of the future strength of recovery, particularly for SMEs. The recent Inflation Report shows that the Bank of England continues to keep a close eye on how credit conditions are evolving…

Changes in credit conditions have been one of the main headwinds affecting the UK recovery and their assumed evolution is a key determinant of the MPC's projections foroutput and inflation.

The Report notes that there has been improved availability for companies, but loan rates for small companies have remained unchanged. In contrast mortgage availability has seen a marked rise.

Over the next couple of weeks we'll get more of the picture on business lending – the Bank's Funding for Lending statistics will be released on Monday and EEF's Credit Conditions Survey will be released the following week. But first off we have the latest info from the SME Finance Monitor.

Profits and plans to grow

The Monitor first looks at the recent performance of the SME sector and the good news is that a higher proportion are making a profit, almost half have plans to grow in the next twelve months and there is a slight increase (from a low base) in the percentage of SMEs planning to grow by selling to new markets. Another notable finding is that fewer companies now see the general economic climate as an impediment to growth.

Recent credit applications

The outlook is brightening, but applications for finance have not yet followed. Over the past couple of years there has been a downward drift in applications for new and renewed facilities.

Source: SME Finance Monitor

Success rates

The final outcomes of those applications has, however, been pretty stable over the period. When overdrafts, loans, new and renewed are taked together, around 70% of SMEs end the process with a facility.

Source: SME Finance Monitor

The future

Looking ahead, the better economic outlook hasn't had a material impact on the appetite for new finance. The proportion of SMEs likely to apply for finance in the next three months is steady at 15%.

So it's not yet clear that either applications or success rates will simply turn a corner now the economic outlook is starting to brighten. In addition, the survey also shows that there is still the challenge of raising awareness about the various initiatives to support SME lending conditions, such as the Appeals process, not to mention the structural problems of an overly concentrated market for SMEs with still limited financing alternatives outside the banks. At the budget we need to see continued action on all these fronts to ensure banks are accountable for their customer service commitments and another round of actions to reduce barriers to new entrants and create a more dynamic environment for SME finance.

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Chief Economist

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