Demand for external finance remains low among SMEs, with the economic climate and ‘discouragement’ from the banks the main barriers to borrowing.
Demand for external finance remains low among small and medium-sized enterprises (SMEs), with the economic climate and ‘discouragement’ from the banks the main barriers to borrowing, finds research.
Applications for new or renewed loans and overdrafts dipped in the past three months, compared with the first six months of the year, according to the SME Finance Monitor conducted by research company BDRC Continental.
Some 12 per cent of respondents to the poll of 10,118 UK businesses with revenues of up to £25 million report that they applied for credit between July and September, compared with 15 per cent in both the first and second quarters of the year.
Demand is unlikely to increase in the next three months, the report finds, as the situation could continue for the next few years. Bank of England governor Mervyn King yesterday warned that a second credit crunch loomed in the UK, mostly due to the Eurozone crisis, after he cut growth and inflation forecasts for the country.
The SME Finance Monitor finds that between January and June, 19 per cent of all SMEs thought they would apply for new or renewed facilities in the next three months, but in the past three months that number has dropped to 13 per cent.
Two per cent of all SMEs surveyed have identified a need for credit in the next three months, but think it is unlikely they will apply. The two key reasons they gave was a reluctance to borrow in the current economic climate and ‘discouragement’, where they have informally approached a bank and felt put off, or where they haven’t asked but assume a negative response.
One in five SMEs report having no specific immediate need for finance but would be unlikely to apply if the need for credit emerged. Of this group, 44 per cent say the key barrier is the current economic climate.
In the past 12 months, 3 per cent of all SMEs have been put off applying for or renewing facilities by the economic climate. Looking ahead, 9 per cent of all SMEs cite the economy as a reason for not applying or renewing in the future. That equates to 409,000 businesses.
In applying for credit, 16 per cent of businesses had their overdraft applications turned down. This number spikes to 52 per cent for SMEs that applied for an overdraft for the first time. In loan applications, 31 per cent were unsuccessful overall, while first-time applications were rejected 41 per cent of the time.
However, the survey isn’t all gloomy news, as two-thirds of SMEs have no plans to apply for new or renew existing finance in the next three months and are happy with that scenario. A further 13 per cent do plan to apply, and of those, twice as many are confident of being successful than are not.
Shiona Davies, director at BDRC Continental, comments, ‘This latest research shows that demand and predicted future demand for SME finance remain low, and that the current economic climate is clearly affecting SMEs’ appetite for external funding. Most of those that do apply are successful.’
John Longworth, director general of the British Chambers of Commerce, adds that while the deteriorating economic climate is having an effect, he blames a ‘fractioning’ in the relationship between banks and SMEs for the current state of business financing.
Longworth says, ‘It is quite clear that relationships between some small- and medium-sized businesses and banks are fractious. The fact that some firms are discouraged from seeking finance on the assumption that they will be refused highlights that a lack of trust continues to be a problem.’