Business optimism improves but appetite for Finance slackens.

In the latest wave of BVA BDRC’s SME Finance Monitor there are signs of increased optimism about the economy and business prospects, but applications and appetite for finance remain muted. The SME Finance Monitor investigates the availability of external finance for the UK’s small and medium-sized enterprises (SMEs). The report is the largest and most frequent study of its kind in the UK, with overall findings based on more than 50,000 interviews with SMEs.

In this study, SMEs typically reported a more positive business environment, though micro SMEs (here defined as the ‘one man band’ with no employees) were slightly less enthusiastic.

The current economic climate continued to be seen as the main obstacle to running the business, with a quarter of SMEs calling it a major concern. The proportion citing the economy as a major obstacle has declined amongst employers, but for micro businesses it is as much an obstacle as ever.

36% of SMEs reported growth in the previous 12 months, down slightly on Q2 (44%), due to fewer micro SMEs reporting that they had grown (32%, down from 42% in Q2).

The forward view showed a similar pattern: 47% of SMEs planned to grow in the next 12 months, slightly lower than the 51% reported in Q2 (to date the highest proportion). Again, this was due to fewer micro SMEs predicting that they would grow – those with employees were as likely, or more likely, to be planning to grow in Q3 as in Q2.

Financial activity remained muted, with lower levels of applications for new or renewed facilities. A few SMEs had wanted to apply for a facility but felt that something had stopped them, and the proportion of ‘Happy non-seekers’ of finance is now at its highest level to date.

15% of SMEs in Q3 reported some form of borrowing event in the previous 12 months (including the automatic renewal of an overdraft facility). This is the lowest level seen to date on the SME Finance Monitor. 7% of SMEs met the definition of a ‘would-be seeker’ of external finance, who had wanted to apply for a loan or overdraft but felt that something had stopped them. The remaining 78% of SMEs were classed as ‘Happy non-seekers of finance’, based on their behaviour in the 12 months prior to interview, and the highest level recorded to date on the SME Finance Monitor. These SMEs had neither sought new/renewed loan or overdraft facilities in the 12 months prior to interview, nor wanted to. 40% of these met the more specific definition of a ‘Permanent non-borrower’ – those with no plans or desire to borrow in the near future.

Looking ahead, appetite for finance remains muted. Awareness of the various initiatives available to support SMEs improved somewhat, but over time fewer SMEs have seen schemes like Funding for Lending as an incentive to apply for finance
One in eight (12%) of all SMEs planned to apply for new or renewed facilities in the three months after Q3 2013.

After a dip in Q2, confidence in bank loan approval amongst potential applicants has improved – 41% were confident that the bank would lend (up from 30% in Q2), as smaller applicants regained some confidence (40% from 29%). However, there remain clear signs of ‘habituated pessimism’, with confidence that the bank would lend below the actual levels of success reported.

Just over half of SMEs were aware of any of the initiatives available to help SMEs. Awareness increased with size of business from 54% of micro SMEs to 78% of larger companies with 50-249 employees.

Of individual initiatives, the Funding for Lending Scheme (FLS) continues to top the awareness charts: three in ten SMEs were aware of the scheme in Q3. 14% of SMEs said that schemes like FLS made it more likely they would apply for external finance. Excluding the ‘Permanent non-borrowers’ who are unlikely to apply for finance, this proportion rises to a fifth of remaining SMEs, but even this proportion has fallen since Q4 2012 (then 27%).

The biggest single group of SMEs (77% overall, 68% once the ‘Permanent non-borrowers’ were excluded) said that such schemes made no difference to them because they were not interested in borrowing. Growth in the economy, particularly in service sectors, will be very difficult without increased finance. More than ever, the problem appears to be a lack of demand rather than restricted supply. The complex reasons for this restricted demand need to be unpacked if the growth logjam, at least among SMEs, is to be broken.