Finance conditions for SMEs improve, but interest in borrowing remains muted

The country could be on the verge of an investment renaissance, but more needs to be done to get companies interested in using external finance again.

Ahead of the release of next month’s data on the government’s Funding for Lending scheme, EEF’s latest Credit Conditions Survey for 2013q3 shows a welcome improvement in finance conditions for SMEs.

The concern now is to get more companies interested in accessing finance at all after a bruising few years of rocky relationships with finance providers.

Among its key findings, EEF’s Credit Conditions survey shows that:

• A balance of just 1% of manufacturers reported an increase in the overall cost of credit – the third consecutive record low for this survey
• More small companies report the cost of new lines of borrowing falling rather than rising for the first time
• There has been a strong rise in the reported availability of new lines of borrowing, now in double digit positive territory with a balance of 16% of companies reporting an increase (compared with equal numbers reporting increases and reductions last quarter). Encouragingly this has been driven by improved availability for SMEs
• The balance of companies reporting an increase in fees increased to 10% from 5.0% in 2013q2
• Worryingly, despite improving prospects for investment, the proportion of companies reporting no need to borrow remains high at 52%. This suggests that many companies are not using external finance.

The balance of 1% of companies reporting an overall increase in the cost of finance is a major change from the low point of the recession where balances as high as 40% reported an overall increase.

However, for the fourth consecutive quarter, more than 80% of companies reported no change in the overall cost of credit. In an additional question this quarter, manufacturers were asked what factors dissuaded them approaching their bank for finance over the past four years.

Two thirds of companies reported no factor, 19% of companies said either the bank implied they would be unsuccessful or their previous experiences applying for finance dissuaded them.

Commenting, David Ost, North West Region Director at EEF, the manufacturers’ organisation, said: “Our survey suggests that Funding for Lending may be at last helping SMEs get credit on the right terms.

"Smaller firms are reporting a big improvement in the availability of new lines of borrowing and more of them are seeing a fall in the cost of new lines of borrowing.

“With stronger growth and a more positive outlook, the prospects for an investment recovery look better. But to get these investment plans over the line, we must get more companies using external finance again.

"We need a more dynamic and diverse funding environment where providers are competing hard to offer firms great deals to finance their investment.”