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SMEs in the UK still caught in funding squeeze

So it’s official: those long talked-about green shoots of recovery are finally growing. The UK economy is coming out of recession, and doing so not only faster than expected by all the pundits and forecasting institutions, but faster than any economy in the EU. GDP grew for four consecutive quarters last year – the first year we’ve seen that since 2007 – and has climbed back to close to its peak in the pre-recessionary days at the beginning of 2008.

Inflation has at last been pegged back below 2%, a level not seen for more than four years, and unemployment is still falling towards 7%. Employment figures are encouraging, as are the intentions of UK businesses to invest in the coming year. This indicates that, slowly but surely, a momentum is building, based on a return in confidence. The Bank of England (BoE) stated in its February Inflation Report: 'The recovery to date has been underpinned by a revival in confidence, a reduction in uncertainty and an easing in credit conditions.'

Perhaps slightly carried away by the positive data, the BoE raised its forecast of GDP growth in 2014 to 3.4%, although the Office for Budget Responsibility (OBR) maintained a more cautious view. It, too, raised its prediction for GDP growth for the year in its December 2013 Outlook, but to 2.8%, more in line with other forecasters, and added: 'We do not expect the quarterly growth rates seen during 2013 to be sustained in 2014.' This is mainly because productivity remains weak. The OBR recognises that a good deal of the upward trend in GDP is due to consumer confidence, boosted by improving credit conditions and a once-again buoyant housing market. Those very conditions lauded by the BoE have in reality benefited the consumer market much more than business, and definitely more than small businesses.

That is not to say that small- and medium-sized enterprises (SMEs) aren’t also feeling more confident, it’s just that they’re still waiting for those all-important credit conditions to ease. Recent surveys show that SMEs are looking forward to improving economic conditions and to increasing their capital expenditure, and are optimistic overall that lending will increase. However, there are few signs that the mainstream banks share this view. There have been a number of government initiatives designed to promote lending, such as the Funding for Lending scheme (FLS) and the Enterprise Finance Guarantee (EFG) scheme, but with both of these schemes the value of loans has fallen, and in the case of the FLS the finance has so far been directed at the consumer market.

The situation should change for the better as far as SMEs are concerned with the reallocation of FLS finance towards business, and with the arrival of the new Business Bank later this year, which is hoped will act as a central funding coordinator for all the government schemes and will genuinely improve access to credit for SMEs. The parliamentary Public Accounts Committee (PAC) has taken the government to task for the continuing lack of support for SMEs, commenting: 'Far from encouraging more lending to SMEs, investment has declined.' A government spokesperson retorted: 'The PACs assessment does not reflect the reality, which is that credit conditions for SMEs are improving.' Let’s hope the talk results in a programme that really encourages lending to SMEs, because if you ask the SMEs themselves, they have yet to find much improvement.

The need for asset finance

Meanwhile, if the mainstream lenders are still intent on building up their own liquidity ratios, at least the asset finance market has been active, increasing new business volumes (NBV) on deals under £20m by 4% in 2013. This is welcome news for SMEs that are now considering using funding, particularly as many have been holding back on expenditure on replacement equipment until market conditions have started to improve.

Figures for NBV provided by the Finance & Leasing Association (FLA) show that there has been significant growth over the last 12 months in the ‘traditional’ sectors – plant & machinery and construction – as well as in IT equipment. This is encouraging in that it suggests the recovery isn’t over-biased towards the services sector. In the auto sector, in a year when new car purchases grew rather than leasing because of the rise in consumer confidence, there was some encouragement in the small business fleet segment, and signs of growth towards the end of last year.

Asset finance and leasing picked up well in the second half of 2013, and it looks like that momentum will continue at least through the first quarter of 2014. Strong growth has been recorded in the broker sector, and there has been an increase in the range of finance provision, with an increase in new funding methods such as peer-to-peer (P2P) lending and web-based innovations such as crowdfunding. The challenger banks have been increasing market share, and new arrivals are showing the appetite to lend is strong – for example, a new challenger bank, Paragon Bank, has just been launched with a focus on auto customers and SMEs, while in the P2P sector there is soon to be a new lender in the form of Money & Co, a venture launched by City superwoman Nicola Horlick.

The volumes provided by asset finance and leasing are still relatively small compared with those of the mainstream banks, but these are crucially important amounts in a market where there is still much uncertainty. Productivity is recognised as key to maintaining the recovery; the bedrock of UK productivity is SMEs, and they need reliable access to finance.

There are a number of challenges in the coming months that the asset finance industry needs to address. In a supposedly mature market, there is still huge room for increasing awareness levels amongst customers and potential customers of the benefits of the variety of funding options – in this, the industry has a powerful lobbying organisation in the FLA. Technology is key in maintaining the highest-quality of service, and to provide such service in all areas the industry needs to recruit the best new talent. Another issue is regulation, and the likelihood of changes in legislation when the Financial Conduct Authority assumes responsibility in April, for which all funders and third parties need to be prepared.

These and many other issues are covered in the new White Clarke Group United Kingdom Asset and Auto Finance Country Survey 2014, which provides in-depth background, comment and analysis. It is free to download here