Most SMEs are planning to grow and profits are stable but appetite for finance remains limited

BVA BDRC (www.bva-bdrc.com) today publishes its quarterly SME Finance Monitor. The largest and most frequent study of its kind in the UK, research findings have been gathered across 33 waves of interviews since 2011 and are based on more than 150,000 interviews with SMEs.

The data to year ending Q2 2019 published today provides further updates on SME sentiment as negotiations over Brexit continued.

Shiona Davies, Director at BVA BDRC, commented: “We are living through uncertain times and this is being reflected amongst SMEs. They remain profitable, but more see improving profit margins as a priority. An increasing proportion are planning to grow, however there is also an increasing gap between growth achieved and expected. Use of finance has increased, yet appetite for finance and new applications remains limited. Most applications are made to the main bank for loans or overdrafts, and most of those who apply are successful, but there are signs of more SMEs considering self-funding alongside, or instead of, an application for finance. Future appetite for finance remains stable, although an increasing minority of SMEs are looking to reduce their use of external finance.”

Key findings

More SMEs are planning to grow, while stable proportions of SMEs have been profitable and the proportion being innovative is no longer declining. More SMEs see the economic climate and/or political uncertainty as barriers to running their business.

  • In H1 2019, 50% of SMEs planned to grow in the next 12 months, increasing by size of SME from 48% of those with 0 employees to 74% of those with 50-249 employees. The overall proportion planning to grow declined somewhat between 2013 (49%) and 2016 (43%), but has since increased again back to 2013 levels.
  • At the same time, there has been less of a change in the proportion of SMEs that have grown (36% H1 2019) leading to a wider ‘gap’ between the two metrics. An increasing minority of SMEs (20% in H1 2019) reported that their business had declined in size, back to levels seen in 2012.
  • 82% of SMEs reported making a profit (H1 2019) and this proportion has been stable since 2015. More SMEs saw improving profit margins as a key priority, increasing from 30% in 2018 to 36% in H1 2019.
  • Over time, the proportion of SMEs that had either significantly improved an area of the business and/or introduced a new product/service declined from 40% in 2012 to 33% in 2018 and across all size bands. In H1 2019 however, the decline was halted as 36% had been innovative, due to more SMEs improving an area of the business.
  • In Q2 2019, 25% of SMEs saw political uncertainty/government policy as a major barrier to their business. SMEs with 50-249 employees were more likely to see this as a barrier (35%) and over time, more SMEs have seen this as a barrier (from 10% in 2015 to 19% in 2018 and 25% for Q2).
  • There has also been an increase in the proportion citing the economic climate as a barrier, from 13% in 2015 to 17% in 2018 and 22% in Q2 2019, with little variation by size of SME (19-23% in Q2 2019).

With an increase in the use of finance in H1 2019, there are now more SMEs using finance than meeting the definition of a Permanent non-borrower, but willingness to borrow to help the business grow remains limited.
· In H1 2019, 46% of SMEs were using external finance, up from 36% in 2018. This was due in particular to more use of overdrafts (19% in 2018 to 23% in H1 2019) and credit cards (14% to 19%).

  • This means that in H1 2019, and for the first time since 2014, there were more SMEs using finance (46%) than SMEs meeting the definition of a Permanent non-borrower (41%). Permanent non-borrowers are SMEs that are not using finance and show no inclination to do so – they are as likely as their peers to be profitable and innovative and more likely to hold £10,000 of credit balances, but they are less likely to be planning to grow.
  • Despite the wider use of finance, SMEs attitudes to finance have not (yet) softened – in H1 2019, 29% agreed that they were happy to borrow to grow, down from 32% in 2018 and the lowest level recorded to date.

A minority of SMEs reported a need for funding, but most who did had taken some action to meet that need. Whilst they were most likely to have applied for finance, the proportion looking to fund some/all of the need themselves has increased over time. Most SMEs who applied for finance were successful.

  • In H1 2019, 4% of all SMEs reported having had a need for funding in the previous 12 months, unchanged for 2018.
  • Most of those who had a need for funding took some action. 61% applied for finance, and half of them (33% of those who took action) applied to their main bank. Compared to those who reported a need for finance in 2018, those interviewed in H1 2019 were somewhat less likely to have applied (55% from 63% of those taking action) and more likely to have provided all or some of the finding themselves (33% from 13%).
  • Across all products, 76% of those applying for a new or renewed facility Q3 2017 to Q2 2019 were successful, with 69% offered what they wanted, 6% with a facility after issues and 2% taking a different product from the same provider. 6% were offered a facility but declined to take it and 18% ended the process with no facility.
  • Success rates increased by size of applicant (74% of those with 0 employees to 89% of those with 50-249 employees) and were also higher for those applying for leasing/hp (94%).
  • Applications for overdrafts continued to be more successful than loans (79% v 63%). Over time, overdraft success rates are stable whilst those for loans have declined slightly.

Looking forward, most SMEs expected to be Happy non-seekers of finance and demand for finance was stable. Future would-be seekers remained likely to see the economic climate as a key barrier to a future application.

  • In H1 2019, 77% of SMEs expected to be a Happy non-seeker of finance in the year ahead, and this proportion is little changed since 2015.
  • 12% expected to apply for finance and this has also changed very little over time. 50% of those planning to apply to a bank were confident of success and this remains lower than the actual success rates reported above.
  • An increasing minority of SMEs (15% in H1 2019) planned to reduce the amount of finance they were using, up from 7% in 2017.
  • 11% of SMEs were Future would-be seekers of finance, who thought they would not apply for finance if a need occurred. Two thirds of this group (66%) said that this was due to the current economic climate, in contrast to the smaller group of past Would-be seekers (2% of all SMEs) where the process of borrowing (time, hassle, expense) was the main barrier (35% of Would-be seekers).