Bank funding is available, but finance applications have fallen. What does this tell us about businesses’ approach to funding their growth?

Recent data from the British Bankers’ Association (BBA) shows that over £5 billion of new lending was approved for SMEs in the fourth quarter of 2016. Looking at 2016 as a whole, use of structured loans (less repayments) increased by £1.5 billion. The evidence, therefore, shows that banks are still willing to fund SME investment.

But as the BBA’s figures also show, although banks said ‘yes’ to eight in 10 applications for finance, applications for bank loans fell by 9% in 2016.

In the BBA’s view, the fall in finance applications was due to businesses exploring alternative options, such as leasing finance, or continuing to build their cash reserves to nance operations. According to the BBA’s data, cash held by SMEs in current and deposit accounts totaled £174.7 billion at the end of 2016, some 7% higher than in 2016.

This picture is backed up by research from BDRC Continental, whose most recent SME Finance Monitor found that only 6% of SMEs had applied for a new or renewed loan or overdraft in the previous 12 months, down from 11% in 2012. According to the BDRC, 46% of SMEs are now seen as ‘permanent non- borrowers’, with little or no apparent appetite for external finance. They substantially outnumber the 36% of SMEs who still use external finance. In addition, 71% of SMEs interviewed for the research would rather self-fund their growth and grow more slowly than borrow to grow more quickly.

Businesses that do seek external funds have a range of alternatives to bank loans. Asset-based lenders are established alternatives to bank lending, and continue to promote the attractions of invoice finance, which enables business funding to grow in line with a business’s sales ledger. According to the Asset Based Finance Association (ABFA), the amount of finance available through asset-based lending to UK businesses reached a record high of £4.3 billion in 2016, up 22% from the year before.

However, even faster growth is being recorded by the peer-to- peer (P2P) lending model. In 2016, P2P lending increased by 67% according to the Peer-to-Peer Finance Association (P2PFA), with most of the funding going to businesses – £4.3 billion from P2PFA members alone. The industry anticipates further strong growth in 2017, due to the introduction of the Innovative Finance ISA. More individuals could be encouraged to lend directly to small businesses with the incentive of tax-free income and attractive interest rates.

Although the P2P figures are currently small in relation to total lending, major lenders are responding to such threats. In February, for example, RBS/NatWest launched a new digital platform called ‘Esme’, allowing both existing and new SME customers to quickly obtain unsecured loans of up to £150,000 through a fully online process, potentially obtaining a decision within an hour.

What does this all mean for business lending? Firstly, businesses have a range of options open to them from a variety of sources. Terms and interest rates will vary, but businesses that need external funding have greater choice than ever.

Secondly, the availability of finance doesn’t mean that businesses will be seeking to increase their debt burden. As the evidence shows, many SMEs are looking to fund their own growth and build up cash reserves.

This is likely to continue, given the uncertainty about what impact Brexit could have on the UK economy, as well as concern about rising supply chain costs and a general increase in inflation. As our latest OMB survey shows, OMBs’ confidence regarding their general outlook, revenue and profit targets have hit a three-year low. So even though money is on offer, most businesses are likely to exercise caution and think carefully about taking it.

Brooke Phillips, Administrator National Creditor Services at Moore Stephens