Improvements in bank lending for some small firms boosting business confidence

22 May 2009

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Confidence is slowly returning to small businesses, despite their cash flow being hit by falling sales, late payments and spiralling costs, a survey carried out by the FPB suggests.

According to the FPB's latest Economic Downturn Panel survey of members, 26% of respondents saw an improvement in the ‘viability' of their businesses in the past month – double the number experiencing a decline.

More business owners said that bank support has deteriorated (18%) than reported an improvement (12%), but the latter figure reflects the highest level of satisfaction with the banks since November 2008, when the panel was launched.

"There are signs that business confidence is returning," said Phil Orford, Chief Executive of the Forum of Private Business (FPB). "Significantly more business owners can see a future for their companies than are pessimistic about their chances of survival."

He added: "A slight increase in support from the banks is likely to be a major factor behind this. Although there is still more dissatisfaction with lenders than there is approval of them, more struggling small businesses are reporting positive experiences. This must be nurtured by further measures to address the cost of lending, which remains restrictive, and by policies from the Government to stimulate the economy and protect both employers and employees."

The banks' provision of overdrafts has improved for 8% of respondents and deteriorated for 3% – the first time since November 2008 that there has been a positive balance. There was no change in the terms and conditions of overdrafts for 90% of the small businesses surveyed. At 6.6%, the average lending rate for overdrafts remains well above the 0.5% Bank of England base rate, but it has fallen slightly compared to the 6.8% rate recorded in April 2009.

In all, 100% of the small businesses surveyed experienced no change in the terms and conditions of loans. Although the average lending rate (6.4%) for loans is also much higher than the base rate, this figure has not increased from the previous month.

Compared to April, when 5% of respondents said that additional security was being demanded for lending, just 2% have reported that this is the case in May. In December 2008, it was 14%. Despite 15% of FPB members surveyed experiencing increases in banking fees, 6% said fees have decreased – double the number recorded in both April and March and three times the number in February.

However, small businesses remain concerned. Only 3% of respondents think that risk management carried out by financial services organisations has improved. Six times that number (18%) believe it has worsened. No-one believes that the Government's support has improved, and 24% think it has declined.

In addition, despite more than one in five of the small businesses (21%) reporting healthier markets for products and services, and 16% experiencing improved market competition compared to 14% reporting a decline, almost a third (29%) of respondents have seen markets continue to deteriorate.

Reduced cash flow is the major concern of small businesses. Not a single respondent saw an improvement in the cost of complying with regulations and none experienced better payment practices. Instead, the cost of compliance increased for more than two-thirds (34%) and late payments have worsened for 57% of the businesses surveyed.

Poor cash flow as a result of late or delayed payments is the main issue for 24% of respondents, with the lack of turnover because of few orders and poor sales being selected by 14%, followed by low margins and steep costs, identified by 11% of respondents.

Despite signs that the confidence of small businesses is returning, the lack of business confidence is still a key issue for 9% of respondents. Others are exchange rates and the value of sterling (8%), lack of finance (8%), gaining and retaining new business (6%) and financing growth (5%). Further concerns are red tape (3%), competition (3%), maintaining credit insurance levels (2%), the cost of lending (2%) and banks' level of service (2%).

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Improvements in bank lending for some small firms boosting business confidence

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