09/07/12

Is accessing finance the main barrier to growth?

by Roger House, FSB chairman, Kent and Medway region

At a recent Kent Economic Board meeting, I was surprised to be delivering fairly upbeat results in our local business barometer.

But now, as we have amalgamated the national trend from our surveys, we see a different result.

More than four in 10 (41%) small firms were refused finance from high street banks as confidence dipped in the second quarter.

With the economy in recession, the FSB’s Small Business Index measured 1.3, down 0.9 points from 2.2 in Q1 as firms continued to feel pressure from rising overheads.

Despite the credit squeeze, more than 50 per cent of respondents said they still plan to grow their businesses over the coming 12 months.

But the proportion of firms looking to grow rapidly shrank from 10.9 per cent in Q1 to 7.2 per cent in Q2.

With one in five firms saying access to finance is the main barrier to achieving growth aspirations, we believe the credit squeeze will impair small businesses’ growth plans, reduce new job creation and further set back the UK’s struggle to emerge from recession.

The FSB has long called for more competition in the banking sector and strongly believes small firms – which collectively produce more than half Britain’s wealth (GDP) – will only be able to access the reasonably-priced finance they need when there is more competition in the banking sector.

Until and unless this happens, small firms and entrepreneurs’ growth aspirations, which have held up remarkably well over recent years, may be crushed.

We have encouraged the Chancellor to ensure the proposals on increasing competition laid out by the Independent Commission on Banking are seen through in his Banking Reform White Paper, issued last month.

Sector confidence: Of 17 industry sectors measured, confidence fell in all but two. Confidence rose moderately in health and social work related firms, as well as vehicle sales and maintenance companies. All other sectors reported a fall with financial and real estate services showing a dramatic decrease.

There were further sharp falls in retailing, leisure, sports and entertainment, as well as hotels and the restaurant and bar trade.

A moderate decline in confidence was reported in manufacturing, IT and other business services.

UK and the South East: Reflecting the sharp decline in confidence in key London industries – finance and property – confidence levels in London remained in negative territory.

Confidence in the capital is now on par with Northern Ireland at -6 points.

Businesses in Kent the South East Local Enterprise Partnership (SELEP) area have shown greater levels of confidence than the UK as a whole with 74% of respondents forecasting the same or increased prospects in 2012.

This may be reflected in the higher proportion having applications for bank funding approved. 48% of businesses covered by SELEP had credit applications approved compared to 43% nationally.

If small firms cannot access credit it constrains their investment plans.

We know from past research many small businesses missed growth opportunities because they couldn’t access the money they needed. There also needs to be more alternative sources of finance that small firms can tap into.

This on-going credit squeeze is becoming critical.