SMEs are more reluctant to apply for finance than ever

In Q1 2013, 19 per cent of SMEs met the definition of a “future would-be-seeker”: they applied for finance they thought unlikely to receive, according to new research.

A BDRC Continental survey asked about the barriers that keep SMEs from applying for finance. Some 63 per cent of respondents said they were reluctant to borrow money in the current economic climate, which equates to 12 per cent of all SMEs – the highest level seen to date. 

Only 39 per cent of SMEs were using external finance, the lowest level recorded, down from 50 per cent in Q1 of 2012. Overall, the use of “core” banking products, such as loans, overdrafts and credit cards, have fallen to 32 per cent.

Based on their behaviour in the previous 12 months, three-quarters of SMEs met the definition of a “happy non-seeker” of external finance. BDCR explains that people within this category have not applied for (more) external finance in the 12 months prior to this investigation, and say that nothing stopped them from doing so. Indeed, 41 per cent of all UK SMEs can be described as “permanent non-borrowers”, businesses that do not use external finance and show little inclination to do so in the future. The proportion of such businesses has increased steadily overtime.

The awareness for government initiatives such as Funding for Lending, however, has improved. Some 18 per cent of SMEs thought such schemes made it more likely they would apply for finance.

But awareness of the appeals process amongst those declined remains low. Less than quarter of those declined for an overdraft and nine per cent of those declined for a loan said they were made aware of the appeals process by their bank. The few people who were aware had not appealed, citing lack of time and a felt that it would not change the outcome.

The survey continues to record lower success rates for smaller, younger SMEs and those with a worse than average external risk rating. First time applicants remain the least likely to be successful. Only 13.38 per cent of first time overdraft applicants and 41 per cent of first time loan applicants were successful.

Whilst we are seeing signs of SMEs retrenching in terms of their use of external finance and the increasing obstacle of the current economic climate for those wanting to seek finance, there are also some positive signs. Profitability and growth are being maintained, and awareness of the Funding for Lending scheme continues to grow. But a significant minority of SMEs said such initiatives would encourage them to apply for finance. 

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