Merlin who?

By Manos Schizas, senior policy adviser, ACCA

For a while now, ACCA has been involved in the preparation of BDRC’s SME Finance Monitor for the British Bankers’ Association Business Finance Taskforce. This survey is now the largest survey of SME access to finance out there, and the latest quarterly results have just been published.

Figures from the latest Monitor are shoeing that SMEs’ demand for finance – especially overdrafts – is falling and that SMEs are increasingly likely to not renew existing facilities.

Interestingly, looking at discouraged demand, the levels of SMEs wanting to borrow but not doing so has remained stable. Meanwhile, the share of SMEs that simply don’t think borrowing is a good idea in the current economic climate has rocketed to 74 per cent.

The Monitor also looked at how small businesses are run, and some of the findings could explain why some small businesses struggle to access new finance. For example, only 41 per cent of SMEs produce management accounts on a regular basis and only 31 per cent have a formal written business plan. This isn’t the kind of thing that would go down well with bank managers who appreciate having solid information about the businesses they are being asked to lend to.

On top of this, only 22 per cent of SMEs had someone in charge of their finances that had any financial training whatsoever. Even amongst medium-sized businesses (50-249 employees), about a quarter didn’t have a financially trained person in charge of their finances.

This pattern of a lack of professional advice was repeated when SMEs were asked if they sought any advice before applying for finance. Only 9 per cent of SMEs that applied for an overdraft and 19 per cent of businesses applying for a loan in the past year sought any professional advice before going to their banks.

There was some positive news on loan approval rates though, which, according to the Monitor picked up between March and September 2011 (from 57 per cent to 73 per cent). Is this a success for the Government’s Project Merlin?

Maybe, but there a couple of caveats to this. Firstly, only loan approval rates picked up, not overdraft approvals. Then there’s the fact that approval rates can be slightly misleading: applications for renewing existing facilities tend to be approved outright, while applications for first-ever facilities tend not to be (this is especially true for overdrafts where approval rates are 88 per cent for renewals and 30 per cent for new applications).

Digging even deeper, we might find that although loan approval rates are ticking up, it is likely that loans are being offered on the basis of assets being provided as security; while this is acceptable for some businesses, it might see younger or smaller businesses without an asset base struggling to access loans.

So, not necessarily the success some might claim the headline figures to be. It gets a little bit worse too: Merlin was designed to release some of the previously discouraged demand for finance, and has had plenty of media coverage; however, only 20 per cent of the SMEs included in the survey had ever heard of it.

Comments

[Rachel Kasumba]

It sounds like the Government Project Merlin is to blame too for the reluctance on the part of several SMEs to borrow. Lack of awareness as you point out definitely plays a part. This situation is somewhat similar to what often happens to funds given/set aside to assist poor people but the projects never get implemented or at the scope that was planned.

These poor results are sometimes due to the types of media used to advertise for the services, brief case operations so that those whom the benefits are intended for don't get a chance to meet with the implementers (often viewed as interested parties) who leave the task to "middlemen" who are either not well-versed with the programs or instead pursue selfish interests at the expense of the program. The intended beneficiaries may also lack the necessary trust to enter into these relationships and transactions.

Otherwise, a lot of SMEs may be afraid of losing their assets in case of likely loan repayment defaults given the way the economy seems to be lagging behind.

Regarding seeking for professional services; the recent scandals involving the financial services profession may have contributed to SMEs seeing no need to pursue them as they question the issues of credibility, professional ethics, if they will actually get value for money, and also the advent of Technology solutions (do-it-yourself software packages).