As applications become more successful, new questions show SMEs seeking to control debt and using trade credit to reduce their need for external finance

BDRC Continental (www.bdrc-continental.com) published the 14th 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 70,000 interviews with SMEs. More information can be found online at http://www.sme-finance-monitor.co.uk/

Shiona Davies, Director at BDRC Continental, commented: “For over a year now, SMEs have been in a more positive mood, but this has not translated into increased appetite for external finance.  New questions published for the first time this quarter provide a better insight into why this might be. Two thirds of SMEs are aiming to pay down any existing debt and then remain debt free, and one fifth say that using Trade Credit reduces their need for external finance. This comes at a time when success rates for loan and overdraft applications are improving, including requests for new money and from first time applicants, an area where success rates have traditionally been lower. The Confidence Gap however still remains amongst those SMEs planning to apply – while 71% of applications in the last 18 months have resulted in a facility, far fewer (46%) of those planning to apply think they will be successful.”

Highlights from the latest research include:

After a year of positive indicators use of, and appetite for, external finance has not changed significantly

• 77% of SMEs are profitable, up from 69% in Q3 last year
• Fewer SMEs now have a ‘worse than average’ external risk rating (45%, compared to 54% in Q3 last year)
• Fewer SMEs (16% in Q3) see the current economic climate as a major barrier, down from 37% at the start of 2012
• 40% of SMEs used external finance in Q3, varying by size from 35% of those with 0 employees to 65% of those with 50-249 employees. This has remained virtually unchanged since the middle of 2012.

In a new question, 68% of SMEs agreed that they were aiming to pay down debt and then remain debt free, suggesting an attitudinal “barrier” to external finance

• Two thirds of SMEs are aiming to remain debt free once any existing debt has been paid off, and this varied relatively little by size of business
• That said, half of this group did also agree that they would use external finance to help their business grow, suggesting that they are not completely averse to future finance
• At the other end of the spectrum, 28% of all SMEs said that they were aiming to remain debt free and would not use external finance to help the business grow.

External finance is only one part of the picture. Including Trade Credit and injections of personal funds increases the proportion of SMEs using “business funding” from 37% to 64% for 2014 to date. Fewer SMEs are reporting an injection of personal funds, while a new question revealed that two thirds of those who use Trade Credit say it has reduced their need for external finance

• Including those who use trade credit and those who have injected personal funds increases the proportion of SMEs using any “business funding” to 64%. The uplift is most marked for 0 employee SMEs (32% using external finance to 60% using business funding)
• Over time, fewer SMEs have had an injection of personal funds into the business to provide finance. In Q3 2014, 28% had received such an injection. 15% felt they ‘had to’, 13% had done so to help the business grow. This is down from a peak of 46% in Q3 2012
• In Q3 2014, 32% of SMEs were using trade credit, and two thirds of them (64%, or 21% of all SMEs) said that this meant they needed less external finance for the business
• In new questions for Q3, 32% of SMEs said that they offer Trade Credit to their customers. This is less likely to result in a need for more external finance (24% of those offering trade credit, or 8% of all SMEs).

While appetite for finance remains stable, success rates for those who do apply are improving, with 71% of all loan and overdraft applications in the last 18 months resulting in a facility. Applications for new money in general, and overdrafts in particular, have seen higher success rates for applications made to date in 2014

• 18% of SMEs interviewed in Q3 2014 reported a borrowing “event” in the previous 12 months. This has been stable since the start of 2013, but is at lower levels than in 2012, when around one quarter of SMEs reported an “event”
• 71% of all loan and overdraft applications made in the 18 months to Q3 2014 resulted in a facility, up from 66% in the 18 months to Q2 2014
• 99% of loan and overdraft renewals in this period were successful, compared to 56% of applications for new money. Success rates for new money are improving over time, having been 46% for the 18 months to Q2 2014
• First time applicants (FTA) remain less likely to be successful (45%) than those who have borrowed before (65%). FTA success rates are no longer declining, and are now higher than they were in the previous 18 months (38% to Q2 2014)
• 79% of overdraft applications made between Q2 2013 and Q3 2014 resulted in a facility, the highest level recorded on the SME Finance Monitor to date
• 56% of loan applications made in the same period were successful. This rate has been stable since the end of 2012.

Amongst those planning to apply for a loan or overdraft, confidence that the bank will agree is higher in 2014 than it was in 2013, but the “Confidence Gap” between actual and perceived success rates persists

• 15% of SMEs planned to apply for a new or renewed loan or overdraft facility in the three months after interview in Q3 2014, and this has been stable over recent waves
• 46% of those planning to apply thought it likely their bank would agree to their request. SMEs with 10-249 employees were more likely to be confident of success (70%) than their smaller peers (45% of those with 0-9 employees). Confidence amongst larger applicants is improving steadily over time (it was 54% in Q3 2012)
• There is a wider “Confidence Gap” amongst those planning to renew (99% success rate for applications made in Q2 2014 compared to 62% who think the bank will agree) than there is for new money applications (66% success rate in Q2 2014 compared to 32% who think the bank will agree).