Demand v. Supply side issues in SME Finance.

The role of bank finance and SMEs’ access to funding has returned to the media spotlight recently. The 10th SME Finance Monitor, an independent report on access to finance from BVA BDRC, was published in December 2013.

This independent and impartial report separates the truth from the myths on access to finance.

The report revealed that most SMEs had no interest in applying for finance. The highest proportion to date (78%) met the definition of a ‘Happy non-seeker’ of finance (those which had not sought new or renewed loans/overdrafts, nor felt anything had stopped them doing so). Furthermore, 40% of all SMEs met the more stringent definition of a ‘Permanent non-borrower’ (those not using or wishing to use external finance currently, in the past five years or with plans to in the next three months). Only 15% of SMEs had a borrowing ‘event’ in the last year, fewer than previously recorded.

Only a small group (7%) had wanted to apply for finance but felt something had stopped them – typically this was either the process of borrowing (time, hassle, expense) or believing the bank would not lend to them. Businesses with under ten employees were more likely to be in this group of ‘Would-be-seekers’ of finance.

However, the majority of applications were successful. Two thirds of applications made in the 18 months up to Q3 2013 resulted in a facility.

These success rates remain higher than the confidence expressed by SMEs who are planning to apply for facilities where only 37% were confident the bank would say yes. The question is why are they so pessimistic?

Renewals remain more likely to be agreed than applications for new funding. Most renewal applications were successful (94%), whilst just under half of new funding applications were successful (46%).

Similarly, first time applicants were less likely to be successful. Among those who have borrowed before, 67% of applications for new money were successful. Amongst first time applicants the figure was 30%. The figure fell from 37% in 2011 suggesting, over time, first time applicants are becoming less likely to be successful.

The study found that the economic climate, not access to finance, was the No. 1 obstacle to business. 10% of SMEs rated access to finance as a major obstacle for their business, compared to 26% who saw the current economic climate as such a barrier. Even when looking solely at those considering external finance in the next three months, the current economic climate remains the bigger obstacle. 38% of this group considered the economic climate to be a major concern, compared to 25% who mentioned access to finance, a slight increase of 2 points on 2012’s figure.