MOVE OVER LOANS AND OVERDRAFTS? WILL BRITAIN’S SMES BE CHANGING THE WAY THEY FUND THEIR BUSINESS?

22% are aware of crowd-funding – just 1% have used it

BDRC Continental (www.bdrc-continental.com) publishes the thirteenth 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 65,000 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: “SMEs continue to be in a more positive mood, with the economy now far less likely to be seen as a barrier to running their business. Use of, and appetite for, external finance remains broadly stable, but we are seeing declining use of, and appetite for, ‘traditional’ core lending products like loans and overdrafts. Larger SMEs with 50-249 employees appear to be moving away from external finance, and are using leasing and HP more widely than loans or overdrafts. This may be the start of a sea change in the way SMEs raise external finance. However, although there has been speculation that newer forms of finance such as crowd-funding are becoming more popular, at present actual usage by small and medium enterprises is very low at 1%.”

Highlights from the latest research include:

Fewer SMEs are using the more traditional ‘core’ forms of finance (overdraft, loans and/or credit cards):

•  30% of SMEs were using such finance in Q2 2014 compared to 36% in the same quarter of 2012. At its peak, four in 10 SMEs were using these products
•  Use of ‘other’ forms of finance such as leasing and invoice finance*, have been more stable over time, currently used by 18% of SMEs.
•  Those planning to apply for finance are also less likely to be considering applying for one of these core products (63% of potential applicants in Q2 2014 compared to 72% in Q2 2012).

Whilst the largest SMEs, with 50-249 employees, remain the most likely to be using external finance, the proportion doing so has dropped over time and they are becoming less likely to have applied, or to plan to apply for, finance:

•  In Q2 2012, 78% of SMEs with 50-249 employees were using external finance. In Q2 2014, that proportion had dropped to 64%
•  The proportion using traditional ‘core’ forms of finance dropped from 71% to 57% of SMEs with 50-249 employees over this period, with lower use of both loans and overdrafts
•  Use of ‘other‘ forms of finance has also dropped (52% to 40%), but in Q2 2014 these SMEs were more likely to be using leasing/HP than they were an overdraft or loan
•  These larger SMEs were also less likely than in previous quarters to have applied for a new or renewed loan or overdraft (9% in Q2 2014 compared to 21% in Q2 2012) or to be planning to apply for facilities (13% in Q2 2014 compared to 20% in Q2 2012).
• A quarter of SMEs with any appetite for external finance (i.e. excluding the ‘Permanent non-borrowers’ (PNBs)) were aware of crowd-funding, however, usage remains very limited:
•  In the first half of 2014, 22% of SMEs (excluding PNBs) were aware of crowd-funding
•  1% were using this form of finance, and a further 7% said they would consider it
•  Two thirds of those aware (13% of all SMEs excluding the PNBs), said they were unlikely to consider using this form of finance
•  Usage/consideration varies little by size of SME

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

• Eight out of 10 SMEs had been ‘Happy non-seekers’ of finance over the previous 12 months, while 17% experienced a borrowing event (including the automatic renewal of overdraft facilities)
•  Eight out of 10 SMEs (78%) met the definition of a ‘Happy non-seeker’ of finance in Q2 2014. The proportion of all SMEs that meet this definition has increased steadily over time. It was around two thirds of SMEs in 2012, and three quarters in 2013
•  Over time the proportion reporting a borrowing “event” has fallen from around one in four in 2012 to around one in six in 2014
•  5% of SMEs in Q2 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 (almost all of it indirect, where the SME assumes they will be turned down and so does not apply) and the process of borrowing (the time, expense, hassle etc.)
• Success rates: Two thirds (66%) of all applications made in the last 18 months resulted in a facility. Renewals have been consistently more likely to be successful than requests for new money
•  Most loan/overdraft renewals were successful (96% of those applied for in the 18 months to Q2 2014)
•  Applications for new money were less likely to be successful (46% of those applied for in the 18 months to Q2 2014), and this proportion is declining over time, moving from above to below a 50% success rate
•  Overdrafts: 74% of overdraft applications made in Q1 2013 to Q2 2014 resulted in a facility. Success rates are relatively stable over time
•  Loans: 53% of loan applications made in Q1 2013 to Q2 2014 resulted in a facility. Success rates have declined somewhat over time, having been 60% for applications in the 18 months to Q1 2013.

There are a number of positive indicators for SMEs:

•  The proportion of SMEs reporting a profit for the previous 12 months trading has increased steadily since the middle of 2013. 76% of SMEs interviewed in Q2 2014 reported a profit (excluding “don’t know” answers), up from 69% in Q2 of 2013
•  36% of SMEs interviewed in the first half of 2014 held more than £5,000 in credit balances compared to 30% in 2012
•  In Q2 2014, 30% of SMEs reported an injection of personal funds into the business in the previous 12 months. The proportion putting in personal funds has declined over time (it was 42% in Q2 2013) as fewer SMEs reported that they “had” to put in funds
•  The proportion of SMEs with a ‘worse than average’ external risk rating had been increasing over time, to 56% in Q2 2013. Since then, the risk rating profile has improved, with 47% of SMEs interviewed in Q2 2014 in this category.
• Looking ahead

In Q2 2014, 17% of SMEs saw the economic climate as a major obstacle to running their business. This was a further decline from the peak of 37% in Q1 2012.

At 8%, access to finance remains less likely to be perceived as a major obstacle. This is also the case for those with any plans or aspirations to apply for finance in future (17% in Q2 2014, 27% in Q1 2013).

In the next three months most SMEs (68%) expect to be a ‘Future happy non-seeker’ of finance. Meanwhile, 14% of SMEs plan to apply for new or renewed facilities – this has changed very little over recent waves:

•  Of those planning to apply, 43% were confident that their bank would agree to their request. 26% were “not confident” – the lowest proportion in recent waves
•  These confidence levels remain lower than the success rate for recent applications (66% for loan and overdraft applications made in the 18 months to Q2 2014).