The Monitor figures paint a picture of falling demand and deleveraging businesses throughout the UK:
• Only 9% of businesses reported any applications for new loans in the last year, down from 12% and 15% in the last two quarters respectively.
• Only 8% expect to apply over the next year. Only 41% reported using any external finance, down from 51% six months ago, and the deleveraging appears to be strongest among micro-enterprises.
A substantial share of SMEs expect to grow over the next 12 months (44%), although even more plan to stay the same size (47%) both figures almost unchanged since the last quarter, but quite how this is to be achieved with ever fewer of them seeking finance is unclear.
Moreover, average and higher-risk businesses are slowly opting out of the loan market altogether. While this is not always a negative sign, these also appear to be the businesses most likely to plan for growth over the next year.
Despite a fall in the share of businesses reporting cash flow-related problems, there is also evidence SMEs expect their finances to become increasingly precarious. Businesses are increasingly likely to apply for finance following financial losses and overdrafts are increasingly used as safety nets rather than in order to finance productive working capital. Ever fewer businesses are repaying debts: just 1% in the year to the last quarter, a quarter of the figure six months ago. The Monitor data suggest businesses aren’t hoarding cash; entrepreneurs are most likely to be genuinely concerned for the future.
Marc Fecher, Corporate Finance Partner at Kingston Smith and a former Chair of ACCA’s Corporate Sector Panel, comments: “The increase in SMEs taking out overdrafts essentially for a rainy day indicates that businesses either expect to need additional, unplanned funding in the short term, or – perhaps more worryingly – perceive that a similar facility won’t be available in the future if they don’t take it when they can.”
This is bad news for the sector’s access to finance; both the SME Finance Monitor and previous research by ACCA show banks are not willing to lend to SMEs for the purpose of liquidity, especially the financing of customer credit or the refinancing of debt; predictably they also don’t like to lend to loss-making businesses. The Monitor figures show businesses also tended to be rejected when they applied for unsuitable types of finance – an error ACCA stresses could be remedied by sound financial advice.
As with previous editions of the Monitor, the last quarter’s figures show a ‘magic circle’ of businesses, established businesses with existing credit facilities and sound fundamentals, are able to access finance fairly easily, but first-time applicants find it much harder. Loans in particular are harder to come by for SMEs with poor credit risk ratings. ACCA is clear as to the reason for this - lenders are simply unable to easily extend credit to businesses on which they don’t have substantial amounts of information. Moreover, the Monitor data analysis suggests entrepreneurs suffer from significant blind-spots around these issues and can often fail to appreciate what makes an application successful.
Other success factors are harder to account for, ACCA says, and the banks need to address them. In fairness to the banks, ACCA notes that overdraft applications between April and September 2011 and loans applications in the last quarter of 2011 were more likely to be successful. However, if the Government and the banks intend to capitalise on this modest success and attract discouraged would-be borrowers, they need to publicise their efforts much more. Only 17% of SMEs even know about the Government’s flagship Project Merlin (down from 20% in the last quarter), and just half of the business population have heard of any initiative to improve the supply of finance to businesses.
However, businesses are not doing themselves any favours. ACCA notes that the use of regular management accounts (37%), business planning (32%) and financially trained staff (23%) among SMEs is still too low, and even falling in some instances. The figures are even worse among micro-enterprises.
Emmanouil Schizas, senior policy adviser at ACCA, said: ‘By all means let’s hold the banks to account for what they are doing wrong, but without the ability to produce high-quality information for lenders and trade creditors and access to high quality advice, businesses aren’t going to see their access to finance improve substantially anytime soon either.’