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SMEs 'returning to external finance'

Small and medium-sized enterprises are showing signs of migrating back to using external finance such as loans and overdrafts for the first time since 2012 - while approval rates have hit a new high, according to new research.

The latest SME Finance Monitor from BDRC Continental shows that once permanent borrowers are excluded, small businesses are more likely to be using external finance (70 per cent, up from 65 per cent a year ago) and to be planning to apply for it in the future (25 per cent, up from 21 per cent in 2012).

The success rate for loan and overdraft applications stood at 81 per cent for the past 18 months - the highest ever recorded by the monitor. This was due to an increase in approvals for those applying for new money (70 per cent, up from 54 per cent in the 18 months to Q4 2012) and a jump in approvals for first-time applicants (61 per cent, compared with 41 per cent).

However, first-time applicants remained less successful than those who had borrowed before (77 per cent) or those renewing an existing facility (99 per cent).

The proportion of SMEs meeting the definition of permanent non-borrowers - that is, not having used external finance for the past five years, not having applied for it in the past year and having no plans to apply for it in the next quarter - has fallen to the lowest level in 18 months at 43 per cent.

SMEs already using external finance were more likely to be willing to use it again. Overall, 45 per cent of firms said they would be happy to use external finance to help their business develop. Among previous users, this rose to more than half but dropped to one-third of those who had not used external finance in the past five years.

Seven out of 10 larger SMEs already using external finance said they would use it again in the future to fund growth.

More than half of those planning to apply for finance (53 per cent) were confident of success, up from 42 per cent in 2012. BDRC Continental noted that confidence levels remain significantly below actual success rates for both renewals (57 per cent versus 99 per cent) and new money (43 per cent versus 70 per cent).

Shiona Davies, director at BDRC Continental, said: "Our analysis is pointing to a return to external finance amongst the larger, more ambitious SMEs, such as those that have plans to expand by 20 per cent or more.

"There will always be a portion of businesses that don't want to use external finance, but it looks as if the number of these, which reached highs in 2015, may be starting to reduce."

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