Confidence that bank will agree to lend increases

BDRC Continental (www.bdrc-continental.com) publishes the twelfth wave of its quarterly SME Finance Monitor investigating the availability of external finance for the UK’s small and medium-sized enterprises (SMEs). The largest and most frequent study of its kind in the UK, research findings date back to the start of 2010 and are now based on more than 60,000 interviews with SMEs. The full report can be found online at http://www.sme-finance-monitor.co.uk/

Shiona Davies, Director at BDRC Continental, commented: “The encouraging news from this latest research is that the economy is seen as less of a barrier by SMEs, more are profitable and almost half (45%) are planning to grow in the next 12 months. Looking forward, 12% of SMEs plan to apply for new or renewed facilities and they have improved confidence that their bank will agree, although the Perception Gap – between expectation of success and the actual numbers who get external finance – still exists. We are not currently seeing any increase in appetite for external finance, with most SMEs (72%) meeting our definition of a Happy non-seeker of finance for the next three months.*”

At-a-glance findings from the latest wave include:

Profitability: The proportion of SMEs reporting a profit has improved slightly in the last two quarters. 69% of SMEs in Q1 2014 reported making a profit in their previous 12 months trading, up from 64% in Q1 2013.

Risk rating: There has been a decline in the number of SMEs with a “worse than average” risk rating, down from 56% in Q2 2013 to 47% in Q1 2014. These changes were driven by 0 employee SMEs, where the proportion with a worse than average risk rating has declined from 62% in Q1 2013 to 51% in Q1 2014.

Injection of personal funds: The proportion of SMEs reporting an injection of personal funds in the previous 12 months has declined over time. In Q1 2014, 30% reported having made such an injection. 15% said that they felt they “had to” inject funds. This proportion has declined somewhat over time from a peak of 26% in Q3 2012.

Use of Trade Credit: In a new question for Q1 2014, 27% of SMEs reported they regularly used Trade Credit. This increases by size of SME, and is more common amongst those with a minimal risk rating, and those also using external finance

• 15% of SMEs use both external finance and Trade Credit in their business
• A similar proportion (17%) use external finance but not Trade Credit
• 12% use Trade Credit but not external finance
• Just over half of all SMEs (56%), use neither external finance nor Trade Credit.

Use of external finance: 33% of SMEs reported using external finance in Q1 2014, the lowest level to date. The decline is across ‘core’ forms of finance (loans, overdrafts, credit cards) and others. The decline in Q1 2014 is mainly due to the 0 employee SMEs. Across 2013 one third (35%) had used external finance, in Q1 2014 this fell to one quarter (26%).

• Including both injections of personal funds and regular use of trade credit boosts the proportion of SMEs using “funding” from 33% to 60%. The boost is more marked for smaller SMEs (0-9 employees 31% to 58%, compared to 65% to 84% for those with 10-249 employees).

Almost half of SMEs are now Permanent Non-Borrowers: Q1 2014 saw an increase in the proportion of SMEs meeting the definition of a “Permanent Non-Borrower” to 48%, the highest level to date (30% in Q1 2012, 41% in Q1 2013). This is the first time there has been a clear ‘gap’ between the proportion of PNBs and the proportion using external finance.

8 out of 10 SMEs have been “Happy non-seekers” of finance over the previous 12 months, while 14% experienced a borrowing event in the last 12 months (including the automatic renewal of overdraft facilities).

• Eight out of ten SMEs (82%) met the definition of a “Happy non-seeker” of finance in Q1 2014. The proportion of all SMEs that meet this definition has increased steadily over time, have been around two thirds of SMEs in 2012, and three-quarters in 2013.
• Over time, the proportion reporting an “event” has fallen from around a quarter in 2012 to around one in six in 2013
• 4% of SMEs in Q1 2014 met the definition of a “Would-be seeker” of finance, who had wanted to apply but felt that something had stopped them. This has decreased over time from around 10% in 2012. The main reasons for not applying remain discouragement and the process of borrowing

Success rates: Two thirds (66%) of all applications made in the last 18 months resulted in a facility. Over time this combined success rate has fallen slightly, from around 70% in 2011. Renewals are consistently more likely to be successful than requests for new money.

• Overdrafts: 72% of overdraft applications made Q4 2012 to Q1 2014 resulted in a facility. Success rates are relatively stable over time.
• Loans: 55% of loan applications made Q4 2012 to Q1 2014 resulted in a facility. Success rates are relatively stable over time.

5% of SMEs are more reluctant to apply for facilities because of a previous decline by their bank: Of those who have ever been declined (6% of all SMEs), three quarters (79%) said that the decline had made them more reluctant to apply for finance. This is the equivalent of 5% of all SMEs who have been declined and feel more reluctant to apply for funding as a result. A quarter of the SMEs that met the definition of a “Would-be seeker” of finance for the previous 12 months said that they were more reluctant to apply because of a previous decline (equivalent to 1% of all SMEs).

Looking ahead: Although it has declined from 37% at the start of 2012 to 20% in Q1 2014, the economic climate remains most likely to be seen as a major barrier for SMEs to run their business. For larger SMEs however “legislation and regulation” is now as likely to be seen as a major barrier.

At 7% access to finance is less likely to be perceived as a major barrier in Q1 2014 – the lowest level to date. This is also the case for those with any plans or aspirations to apply for finance in future (16% in Q1 2014, 27% in Q1 2013).

In the next three months most SMEs (72%) will be a “Future Happy non-seeker” of finance – this has increased steadily over time. Meanwhile 12% of SMEs plan to apply for new or renewed facilities

• Of those planning to apply, 46% were confident that their bank would agree to their request, the highest proportion since the start of 2012 (52%)
• Confidence the bank would agree is up (41% in Q3 & Q4 2013 to 46% in Q1 2014)
• These confidence levels remain lower than the success rate for recent applications (66% for loan and overdraft applications made in the 18 months to Q1 2014).

​Awareness of initiatives: Half of SMEs (52%) are aware of any of the initiatives tested that offer help and support to SMEs, and this is stable over time. For Q1 2014:

• Awareness of the Funding for Lending scheme has stabilised, at 27%, having increased steadily during 2013
• 12% of all SMEs are aware of the appeals process – this has changed little over time
• 17% of SMEs (excluding PNBs) were aware of crowd funding, with 6% either using or prepared to consider using this form of finance.