The survey of 5,000 firms – including food and drink manufacturers – revealed that SMEs were increasingly choosing not to access external finance, which represented “a clear drag on growth”, said the organisation. Only 39% of SMEs reported using any form of external finance, compared with 50% last year.
Andrew Johnson, EEF senior economist, told FoodManufacture.co.uk: “The survey shows that there has been a breakdown in trust in the banking and financial services sector and SME businesses.”
Johnson added:“The steady drift away from using any external finance has to be concerning – especially as most economic forecasters continue to look to investment to boost growth over 2013.”
‘Banking environment needs to be more competitive’
The SME banking environment needed to be more competitive, he said. “The government should look hard at the state of competition in SME banking in the UK. It should launch a focused review on what more can be done to stimulate a more dynamic SME banking sector, and think about how best a proposed Business Bank could focus on competition in SME banking.”
The drive towards enhanced competition was supported by the International Monetary Fund – as revealed by its recent Article IV mission to the UK – said Johnson.
The need for action was even more pressing after the divestiture of branches from Lloyds having been set back by the Co-Op’s withdrawal. “We urge the government to launch a short, focused review on how to deliver a more dynamic market,” he added.
Funding for Lending Scheme
More positively, the survey revealed a significant proportion of SMEs were more likely to apply for finance as a result of the government’s Funding for Lending scheme (FLS). Nearly one third (27%) of SMEs were aware of the scheme. The government recently strengthened incentives for banks to focus the scheme on SME lending.
But while the current focus on alternatives to bank finance was important and should continue, the reality was that most SMEs would continue to look to banks as their main external finance provider for the foreseeable future, said EFF.
The survey also confirmed that nearly one-half (41%) of SMEs were classified as permanent non-borrowers – the highest-ever recorded proportion. These are SMEs that have not borrowed money for the past five years and do not plan to borrow money in the future.
The full report is available here.
SME finance monitor survey
• Only 39% reported using external finance.
• 41% were permanent non-borrowers.
• 48% of SMEs planned to grow in the next 12 months.
• Excluding permanent non-borrowers, one quarter of SMEs were planning to apply for finance in the next 12 months.