AS CLAIMS and counter-claims have flown back and forth between SMEs and banks in the debate over the accessibility of finance, banks have been accused of not lending enough, turning down viable SMEs and only offering to lend with onerous terms.
On the other hand, banks report a decline in demand for borrowing because SMEs need less external finance to accommodate lower sales in periods of low, or no, economic growth and banks themselves attempt to limit their exposure in a difficult economic climate.
Against this backdrop, the Business Finance Roundtable – comprising the major banks, business groups, accountancy bodies and government – commissioned BDRC Continental to conduct and report on the issue. Totally independent and based on over 5,000 respondents each quarter, these quarterly reports will build into the largest and most detailed study of SME views of bank finance ever conducted in the UK.
One of the key factors to emerge from the SME Finance Monitor is the expectation of SMEs and what happened when they applied for finance. Only half of SMEs currently use any external finance and just one in five reported any borrowing related event in the previous 12 months.
The most common borrowing ‘events’ are new applications for, or renewal of existing, loan and overdraft facilities: 15% of SMEs have experienced one of these borrowing events in the last 12 months, with 8% applying for a new facility and 10% renewing one. Larger SMEs, with 50-249 employees, were more likely to have had one of these borrowing events (32%).
Positive initial response
The bank’s initial response was to offer seven out of ten overdraft applicants and six out of ten loan applicants what they had applied for. 17% of overdraft applications and 28% of loan applications were initially declined by the bank, with the remaining SMEs offered something.
The age of the business emerged as a key factor: for overdraft applications, SMEs over five years old were more likely to be offered the overdraft they wanted. For loan applications, the same applied to SMEs over 10 years old.
However, at the end of the lending process, 12% of those that had been through an overdraft event and 28% of those that had been through a loan event emerged with nothing. In addition, 15% of all SMEs are what the author of the report classifies as ‘unrequited’ – meaning that they would have liked to apply for a facility but had not done so. Smaller and younger businesses are more likely to fall into this category, including a quarter of all start-ups. Most said that not applying for this facility had impacted on their business.
Each unrequited SME mentioned a range of reasons for not approaching a bank. The four key themes were: current economic climate, the perception that banks discouraged their application (either directly, after making an informal enquiry at the bank, or indirectly, because they expected to be refused), the process of borrowing, and not wanting to lose control of their business.
Once all negotiations were complete, 85% of SMEs that had applied for a new or renewed overdraft had one and 66% of loan applicants had a loan facility, although in some cases this might not have been exactly what they originally asked for. Larger SMEs, and those with a good external risk rating, were more likely to have a facility, as were those seeking to renew an existing facility.
Four out of five successful applicants thought their application was considered fairly. Those who had not been successful were less likely to feel they had been treated fairly (20%), yet only one quarter of them felt they would have been treated more favourably at another bank
External advice plays a limited role
Half of all SMEs produce regular management accounts or have a written business plan, ranging from 45% of those with no employees to almost all, 96%, of those with 50-249 employees. Interestingly, those whom had applied for new or renewed facilities were slightly more likely to undertake such planning (60%) than those who had not applied (50%).
Importantly for professional advisors, very few SMEs had sought any external advice before they made their application for finance, from 9% of those seeking a new or renewed overdraft to 20% of those seeking a new or renewed loan. Where advice was sought, accountants were the most likely source.
Such low levels of advice may be attributable to seven out of ten of these SMEs having reported feeling confident about the application before they approached the bank. There is also little evidence so far of external advice being sought if an issue arises during the borrowing process, despite the fact that the advice offered by banks at this point is not well rated by the SMEs involved.
Shiona Davies is a director at research company BDRC Continental and author of the SME Finance Monitor report
• A full copy of the first SME Finance Monitor report can be accessed here.
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