BDRC Continental (www.bdrc-continental.com [1]) has published its quarterly SME Finance Monitor. The largest and most frequent study of its kind in the UK, research findings date back to the start of 2011 and are based on more than 100,000 interviews with SMEs.

The Q4 2016 data published today provides an update on the period immediately after the EU referendum campaign and shows a divergence in sentiment across the SME community. While smaller SMEs report ‘business as usual', larger SMEs and those who trade internationally have greater concerns about the future. The data also shows a lower appetite for external finance in 2016, with many SMEs preferring to self-fund (for example through retained profits, credit balances or trade credit).

Shiona Davies, Director at BDRC Continental, commented: "While sentiment across the SME sector as a whole remains buoyant, SMEs that trade internationally are increasingly concerned about the economic climate and political uncertainty. For SMEs that both import and export, concerns about political uncertainty increased from 8% in 2015 to 32% in Q4 2016."

"When it comes to financing business growth, SMEs' reluctance to use external finance continues. 5% of SMEs applied for a new or renewed loan or overdraft facility in 2016 - the lowest level since the Monitor began in 2011. Notably, this doesn't seem to be a lack of confidence, with more than 6 in 10 SMEs confident the bank would agree to a future request and 8 out of 10 that do apply being successful." added Davies.

As of April 2017, BDRC Continental will be issuing monthly updates on key SME Finance Monitor data which will provide further insight into SME sentiment.

Key findings

While smaller SMEs continue to report "business as usual" there are signs that larger SMEs and those who trade internationally have more concerns about the future

• In Q4 2016, 7 in 10 SMEs (70%) said that none of the barriers tested presented a ‘major obstacle' to their business (up from 65% in Q4 2015). The proportion of SMEs overall rating either the ‘current economic climate' or ‘political uncertainty and future government policy' as major barriers to their business changed very little after the referendum. In Q4 2016 they were rated as major barriers by 13% and 12% of all SMEs respectively, virtually unchanged from 2015 (13% and 10%)
• Between 2015 and Q4 2016 there was some increase in levels of concern amongst the largest SMEs with 50-249 employees, from 8% to 13% for the economic climate and 7% to 15% for political uncertainty. More marked increases were seen amongst SMEs that trade internationally, notably those who both import and export where concerns about the economic climate rose from 17% in 2015 to 35% in Q4 2016 and concerns about political uncertainty from 8% to 32% over the same period 
• There was some further softening of future growth expectations. In 2016, 43% of SMEs expected to grow in the coming 12 months, continuing a steady decline from the half (49%) of SMEs in 2013 who expected to grow. Meanwhile the proportion of SMEs that had actually grown has remained steady over time at 4 in 10 (excluding Starts). During 2016 itself growth aspirations initially fell (from 45% of all SMEs in Q1 to 41% in both Q2 and Q3), before recovering to 47% in Q4.

The trends already seen on the SME Finance Monitor of limited demand for finance and almost half of SMEs showing no appetite for finance continued during 2016

• 37% of SMEs were using external finance in 2016 (ranging from 33% of those with 0 employees to 64% of those with 50-249 employees)
• This has been stable since 2014, but lower than in previous years (in 2012, 44% were using external finance) due primarily to fewer SMEs using the core forms of finance (loans, overdrafts and credit cards)
• 47% of SMEs met the definition of a Permanent non-borrower of finance in 2016, also unchanged from 2015
• The proportion of SMEs that have applied for a new or renewed loan or overdraft facility was 5% in 2016, the lowest level recorded on the Monitor to date. In 2012, 11% of SMEs had applied, falling to 7-8% for 2013 to 2015 and then 5% in 2016. The decline was seen across all size bands, risk ratings and once the ‘Permanent non-borrowers' had been excluded
• Future appetite for finance has been more stable over time. In 2016, 12% planned to apply, only marginally lower than the 13% seen in both 2014 and 2015.

This decline in appetite for finance does not appear to be a confidence issue for most SMEs, rather a preference to use their own resources or accept a slower level of growth that they can self-fund

• Over the course of 2016, an increasing proportion of future applicants were confident the bank would agree to their request, increasing from 48% in Q1 2016 to 59% in Q4 2016. For the year as a whole, 55% were confident of success, a further increase over time from the 42% who were confident in 2012
• Those not planning to apply to a bank are now asked how confident they would be about the success of a hypothetical application. 69% were confident in Q4 2016 and levels of confidence remained above those of SMEs that were planning to apply
• Rather than fearing a decline if they were to apply, most SMEs appear confident they could apply for funding (61% of all SMEs were confident they could apply to a bank other than their own for funding) but prefer to grow through their own resources. 8 in 10 (80%) agreed that their plans for the business were based on what they could afford to fund themselves and 7 in 10 (71%) that they would accept a slower rate of growth rather than borrow to grow more quickly and these views are shared by smaller and larger SMEs and once the Permanent non-borrowers are excluded
• The proportion of SMEs who are willing to borrow to help the business grow remained lower at 4 in 10 SMEs (43%). Those already using external finance remained more likely to agree with this statement (54%) than those who were not currently using any finance (36%). Overall, 1 in 10 of all SMEs (11%) were planning to grow in the next 12 months and although not currently using finance would consider it to help the business grow, providing an indication of possible future demand for finance.

Amongst those who do apply, a consistent 8 out of 10 are successful

• 83% of applications made for new or renewed loan or overdraft facilities in the 18 months to Q4 2016 were successful. This proportion is unchanged from the 82% who were successful in the 18 months to Q4 2015 and remains higher than previous periods (69% of applications were successful in the 18 months to Q4 2012).

• Almost all renewals of loans and overdrafts were successful, with no change over time. Overall success rates for new money increased from 49% in the 18 months to Q4 2013 to 70% in the 18 months to Q4 2015 and have remained stable since (71% for the 18 months to Q4 2016)
• Initial data for applications made post Brexit shows no significant change in success rates at this stage