Better supply of finance to SMEs fails to spur demand

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After the initial excitement following the CMA’s launch of its provisional findings back in October 2015, the issue of access to finance for UK corporates has somewhat dropped off the map. Economists and politicians have been too preoccupied with interpreting some of the negative signals coming from the economy – both global and domestic - to think about access to finance policy.

However, the ability of businesses to tap into external finance to fund their growth plans is key for economic growth and it’s therefore vital that all stakeholders keep their eye on the ball.

 

The health of the SME sector is improving

 

Today the BDRC published its quarterly SME Finance Monitor report for q4 2015. What does the report tells us about the health of the SME sector?

 

  • 80% of SMEs reported making a profit in the past 12 months, up from 70% in 2013.

  • 13% of SMEs cited the current economic climate as a major barrier to their business, down from 37% in q1 2012.

  • 40% of SMEs (excluding starts) had grown their business in the previous year.

 

And success rates are on the up

So more SMEs are making a profit, more are planning to grow and the economic climate is more conducive to their growth plans. What does this mean for lending?

  • 81% of all loan/overdraft applicants in the 18 months to q4 2015 resulted in a facility, up from 69% in q4 2012.

  • The success rates for first time applicants has increased to 61% from 41% in the same period.

The improvement in success rates a good indication that supply dynamics have improved somewhat, particularly for larger SMEs. The news wasn’t bad for the pool of applicants that has been traditionally less likely to be successful when applying for finance either.

  

But less are using external finance

 That is the good news; more SME’s are profitable and successful when applying for credit. However, the pool of SMEs using external finance is getting smaller and smaller:

  • 37% of SMEs in 2015 were using external finance, down from 44% in 2012.

  • 47% of SMEs were Permanent Non-Borrowers – those businesses who have not applied nor are looking to apply for finance – up from 34% in 2011.

  • 75% SMEs aim to pay down existing debt and then remain debt free.

Essentially, the report shows more of the same for SME’s access to finance trends; at the same time that SME profitability, success rates in accessing finance and confidence in the economy is on the up, the use of external finance is heading in the opposite direction. What is more, demand for finance remains lacklustre, showing a lingering reluctance by SMEs to engage with the financial sector.

 

What’s needed to drive SMEs back into borrowing?

Some of the sluggish demand for finance can be traced back to the need for more competition in financial markets. Low diversity and transparency in financial products and obscure benefits from switching banks is limiting churn in the access to finance space. Complementing the CMA's proposed behavioural remedies with lowered barriers to entry for challenger banks could go a long way towards boosting competition in the financial sector and reeling back in disengaged businesses.

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