More of the same in the access to finance landscape

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Today’s Credit Conditions Review for q4 2016 by the Bank of England reconfirmed a familiar picture in the access to finance landscape for UK businesses:

  • Lending to UK corporates remained in positive territory, although growth in lending for SMEs continued to trend lower than for large corporates.
  • Demand for finance continued to be lacklustre among businesses of all sizes.

 

Supply continues to improve

The three month annualised stock of lending for all UK businesses continued on its growth trajectory in November 2016, marking the 11th consecutive month of expansion. The breakdown by business size was also encouraging, with lending to both SME’s and large corporates posting growth in the penultimate month of 2016.

 

BoE-CCR-Nov-16---Supply-by-size 

 

 However, the rate of growth for SMEs was half of that of large corporates, 1.9% compared to 3.8%, following a similar pattern to the rest of 2016.

 

But demand persistently low

While credit conditions have loosened – even for smaller SMEs which have found it traditionally harder to draw credit since the financial crisis – demand for finance continues to trend lower. The BoE Credit Conditions Survey attributes the weakness in demand for Q4 2016 to “significant reductions in capital investment and commercial real estate”.

This is consistent with the BoE’s Agents’ summary of business conditions for q4 2016 which saw a slowdown in investment intentions over the second half of 2016 for both services and manufacturing companies.

 

Could this be a Brexit effect?

Lacklustre demand for finance predates the EU referendum; the SME Finance Monitor has consistently reported soft demand for finance among UK SMEs, despite steadily improving profitability and solid growth plans.

In Q2 2016, only 36% of SMEs reported using external finance, a proportion that has consistently edged down from 44% in 2012. Perhaps more strikingly, 71% of SMEs agreed that they would accept a lower growth rate than borrow to grow faster.

However, the fall in capital investment and commercial real estate cited as reasons for soft credit demand in the BoE survey could be a tentative sign that Brexit is adding another layer to the reluctance for UK corporates to access bank finance. More information and data will be required over the coming months to disentangle whether the further deterioration in corporate demand for credit is indeed down to Brexit or simply a continuation of a longer-term trend.

 

What about manufacturing?

The landscape described above is pretty similar for UK manufacturers. Credit conditions are conducive – perhaps even more so for manufacturers given the availability of valuable collateral to pit against loans – but manufacturers are consistently shunning bank lending.

Another set of BoE statistics released earlier this month showed that net lending to manufacturers fell by 6.8% in November 2016 compared to the same month a year ago. This marked the 6th consecutive month of contraction.

 

BoE-CCR-Nov-16---Mfg 

 

EEF’s own survey on manufacturer’s attitudes to external finance yielded similar results. While a balance of +69% manufacturers said they are confident they would secure bank finance if they needed it (although there is some variation by business size with +81% for large companies compared to +66% for SMEs), a balance of -29% said they are more likely to use external finance than two years ago.

What’s more, 53% of manufacturers agreed with the statement that they would postpone or cancel investment if they cannot fund it internally. Rings any bells?

 

A2FreportMfgersreluctanttoaccessfinance 

 

What next for access to finance?

Surely this is far from an ideal situation, especially when considering that the UK does not compare favourably in financing for SMEs internationally either. The improvement in the supply dynamics is encouraging news and the CMA’s recommendations to boost competition in the retail banking sector should help to further move the needle on this front.

The debate is now shifting to finding ways to encourage a greater appetite for finance among UK corporates, as well as a change in focus from bank lending to the full package of financing solutions such as equity capital. In this vain, we’ll be waiting for the publication of the announced consultation on patient capital from HMT with some anticipation.

 

 

 

 

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