BDRC Continental’s study, based on more than 100,000 interviews with small and medium businesses, revealed a marked decline in appetite for external finance in the second quarter of 2016 than in previous years.
The Q2 2016 data published today covers the period of the EU referendum campaign and shows a continued decline in SME interest for external loan and overdraft finance.
Many SMEs reportedly prefer to self-fund, through retained profits, credit balances or trade credit, for example.
“The lack of appetite for external finance isn’t based on a concern about securing approval, as most SMEs are confident the bank would say ‘yes’ if they were to approach them for a facility. When it comes to applications, the reality is that 8 in 10 of those who do apply end the process with a loan or overdraft,” Shiona Davies, director at BDRC Continental said.
Initial analysis of the interviews conducted in Q3, since the referendum result was announced, shows little change in how SMEs felt about the health of the economy.
“This ‘business as usual’ stance is particularly true for smaller and domestic SMEs – and while larger SMEs and those who trade internationally currently have more concerns (notably importers) these are not shared by the majority of SMEs” added Davies.
A drop in appetite for external funding
62 per cent of SMEs with 50 to 249 employees were using external finance from the second quarter of 2015 to the same period this year. Smaller firms understandably refrained from seeking funding externally, with only 32 per cent of micro-businesses taking loans, overdrafts and credit cards.
While this has been stable over recent quarters, these figures are considerably lower than in previous years.
The proportion of SMEs that have applied for a new or renewed loan or overdraft facility has fallen from 11 per cent in 2012 to 6 per cent for YEQ2 2016 across all size bands, risk ratings and once the ‘permanent non-borrowers’ have been excluded.
Rounding out these statistics, only 13 per cent of the surveyed SMEs plan to apply for finance in the future.
Not a confidence issue
This decline in appetite for finance does not appear to be a confidence issue for most SMEs, rather a preference to use their own resources or accept a slower level of growth that they can self-fund. 76 per cent of SMEs in Q2 2016 remains the ‘future happy non-seekers’ – a figure that has remained unchanged post Brexit.
Eight in 10 SMEs agreed that their plans for the business were based on what they could afford to fund themselves, and an overwhelming 71 per cent agreed that they would accept a slower rate of growth they funded themselves rather than borrow to grow more quickly.
Close to half of the surveyed businesses (47 per cent) agreed that they never thought about whether their business should use external finance. Both these views were expressed more strongly by smaller SMEs
Bank loans seen as a dependable option
In the first half of the year, 50 per cent of those planning to apply for bank finance in the next three months were confident that the bank would say yes. Among those with no plans to apply (who expect to be ‘future happy non-seekers’), confidence that the bank would say yes to a hypothetical application was higher at 67 per cent.
There has been no change overall in these levels of confidence post Brexit.
Amongst those who do apply, eight out of 10 are successful in securing a new or renewed loan or overdraft facilities.
81 per cent of applications in the 18 months to the second quarter of 2016 were successful. This proportion has increased over time: in 2012 over the same period, only 69 per cent of applications were successful.
BDRC Continental’s SME Finance Monitor caches data back to 2011, and from October 2016, will publish monthly insight of trends over time to put current SME sentiment into context.