SME confidence in the economic climate is not reflected in demand for external finance.

In a more optimistic atmosphere, there are few signs of any increasing appetite for external finance among small and medium businesses. BVA BDRC’s SME Finance Monitor reported that these businesses are predicting growth but not looking to lenders for funds.

The proportion of small and medium-sized enterprises (SMEs) rating the economic climate as a major barrier to their business has declined to its lowest level to date – just 21% now, down from a peak of 37% two years ago. Larger SMEs – businesses with 10-249 employees – also reported good news, with two thirds anticipating growth in the next 12 months, compared with about half of all SMEs.

The number of SMEs (40%) not using finance and with no plans to do so matched the number who were using external finance (41%). Permanent non-borrowers are defined as SMEs that are not using external finance, have not applied for finance and do not have any plans to apply in the three months after interview. So what is stopping SMEs applying for finance?

It may come as a surprise, but there was little sign of a frustrated demand for finance with only a small and declining number of SMEs feeling that something had stopped them applying for finance they had wanted. Just 4% of SMEs met this definition of a ‘would-be seeker’ of finance in the 12 months to Q4 2013.

Applications for new or renewed finance remained stable but at lower levels in 2013 than 2012. 8% of SMEs had applied for a new or renewed loan or overdraft facility in the 12 months prior to Q4 2013. Overall, 17% of SMEs reported some form of borrowing ‘event’ in Q4 (including the automatic renewal of an overdraft), compared to 21% in the 12 months prior to Q4 2012.

Around seven out of ten of all loan and overdraft applications each quarter resulted in a facility. Those renewing an existing facility were twice as likely to be successful (96%) as those applying for new funds (48%). These success rates did not reflect SME confidence in receiving a facility. Only 56% of those applying for renewal and only 29% applying for new funds had confidence they would be successful. Two-fifths of potential applicants in Q4 2013 were confident that their bank would agree to a future request, unchanged from Q3.

As in previous years, smaller, younger SMEs and those applying for the first time were less likely to be successful. Success rates for first time applicants in 2013 to date are lower than in previous years, with 60% ending the process with no facility (up from 51% in 2012).

15% of SMEs planned to apply for new or renewed finance in the three months after interview. Appetite amongst larger SMEs with 10-249 employees was lower in 2013 than in 2012.

SMEs remain more likely to be aware of Funding for Lending (FLS) than other initiatives, but over time fewer SMEs feel that it will encourage them to seek finance, with three quarters saying they are not looking for finance. Half of SMEs were aware of at least one of the support initiatives tested, but FLS had the highest awareness of any individual scheme at 29%.

The proportion who felt that schemes such as FLS would encourage them to apply for finance has declined during 2013. In Q4 2013, 14% of SMEs thought such schemes would provide an encouragement, down from 20% a year earlier.