Telling the truth about SME life today

Use of external finance at lowest levels since early 2010

Over half of all small and mid-sized businesses neither use any external finance, nor have any immediate plans to do so, according to the sixth quarterly SME Finance Monitor by market research consultancy BDRC Continental. In Q3 2012, 40 per cent of SMEs reported using any form of external finance, the lowest levels reported in the SME Finance Monitor since its beginnings in early 2010. The report is based on more than 30,000 interviews with SMEs.

Use of core banking products, such as loans, overdrafts and credit cards declined by five per cent. Of those that applied, however, 71 per cent were successful. Only a quarter were declined equivalent to three per cent of all SMEs and the remainder took other funding.

Overdraft applications continue to be more successful than loans, with smaller, newer businesses and those looking for funding for the first time the most likely to be declined by their bank. Amongst these first time applicant SMEs, 42 per cent now have a facility, seven per cent have taken other funding, and 51 per cent have no facility.

Fewer SMEs are planning to apply for external finance

In Q3 2012, a mere 12 per cent of SMEs stated they planned to seek external finance in the next year. Only a third of those planning to apply were confident that the bank would agree to their request – this is the lowest level seen to date in the survey, and notably below the current success rates for applications. 

The pressure of the challenging economic climate is starting to show, with profitability showing a downward trend of five per cent. Other key indicators seen in the past 12 months of the Monitor include: more SMEs with a ?worse than average external credit risk rating; more holding smaller credit balances of £5000 or less; and more using their overdraft facility regularly.

Almost half of SMEs interviewed between April and September 2012 had injected personal funds from the owner or directors recently. Some 18 per cent had chosen to do so to fund growth, whilst 26 per cent had felt they had no choice.

Shiona Davies, Director at BDRC Continental, said “There are clear signs that SMEs are under pressure, and that fewer of them are seeing external finance as an option for their business. Some SMEs feel discouraged from applying, and their perception is that access to finance is becoming more of a barrier. This is despite the fact that 71 per cent of applications have been successful since we began the Monitor, although first time applicants continue to find it more difficult to access finance.

Although the banks and government are undertaking various initiatives to boost lending, awareness of these hasn’t increased over the past 12 months. This suggests that communication and awareness raising activities could help to encourage SMEs.

The key findings of the report are, at one glance:

  • 57 per cent of all SMEs neither used external finance nor planned to apply for any in the next three months, the highest proportion seen to date;
  • Ten per cent of SMEs reported a Type 1 borrowing event (an application for a new or renewed loan or overdraft facility) in the 12 months prior to interview in Q3 2012; and
  • Half of all SMEs with an overdraft reported that it had been automatically renewed by the bank the equivalent of 12 per cent of all SMEs having such a renewal

Most applications for funds are successful, three per cent of all SMEs were declined:

  • For all applications, 74 per cent of overdraft applicants had a facility, three per cent had taken another form of funding, and 24 per cent did not have a facility;
  • For loan applications reported in interviews, 56 per cent of applicants had a facility, eight per cent had taken another form of funding, and 35 per cent did not have a facility;
  • First time applicants (for loans or overdrafts) remained less likely to be successful. These applicants were typically smaller, newer, businesses, with a poorer external risk rating profile, and somewhat less likely to have made a profit; and
  • On limited base sizes, only a minority of those declined for a loan or overdraft were offered alternative forms or sources of funding, the advice provided by the bank was typically rated “poor”, and awareness and use of the appeals process remains very limited.

Fewer SMEs are planning to apply for external finance, and those that will are less confident of success:

  • Confidence amongst those planning to apply for finance that the bank will agree to their request has declined again to the lowest level yet seen in the survey, 33 per cent. Success rates for renewal applications are, however, around 90 per cent, compared to 53 per cent who were confident of success with a future renewal; 
  • For new money, success rates for applications are around 56 per cent against a confidence level for future applications of 21 per cent;
  • In Q3 2012, 34 per cent of all SMEs rated the current economic climate as a major barrier in the next 12 months, down slightly from previous quarters;
  • Access to finance was rated a major barrier by 13 per cent of all SMEs, up from ten per cent in Q4 2011; 
  • The biggest group of SMEs remained the “happy non-seekers” of finance; and
  • Almost half of SMEs in Q3 reported an objective to grow in the next 12 months, maintaining the slightly higher rates seen in 2012 compared to 2011, and due to more businesses with no employees, and those with a worse than average risk rating, planning to grow.

Taskforce initiatives:

  • 46 per cent of SMEs were aware of any of the Taskforce initiatives in Q3 2012. Overall awareness was unchanged from 12 months ago, at a time when SMEs use of, and appetite for applying for, finance appears to be falling; and
  • 18 per cent of SMEs were aware of the National Loan Guarantee Scheme. Excluding the “permanent non-borrowers”, a quarter of  remaining SMEs thought such a scheme, offering a discount on the interest rate, would make them more likely to apply for this type of funding the equivalent of almost 700,000 SMEs.


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