“Little to cheer for UK SMEs”

(Some) things may not be getting worse, but significant financing challenges remain

The key chart

Trends in net lending flows to UK SMEs (Source: BoE; CMMP)

The key message

There was little for UK SMEs to cheer in the latest “Money and Credit” data release from the Bank of England. The only positives for this systemically important economic sector were: (1) monthly negative financing flow dynamics did not get worse; and (2) the average cost of borrowing fell slightly.

  • SMEs have been repaying bank loans and overdrafts since October 2022. In September 2023, net repayments totalled -£284m, less than -£747m in August and -£1,184m in July
  • Cumulative flows in the twelve months to September 2023 increased to -£9.9bn from -£9.2bn and -£8.8bn in August and July respectively, however
  • Note that lending to real estate activities (that involve buying, selling and renting of own or leased real estate) is the only sub-sector to experience positive 12-month cumulative lending flows (£0.3bn in September 2023). With monthly repayments in four of the past six months, these cumulative flows are slowing sharply now, reflecting wider challenges for the sector
  • The average cost of borrowing for SMEs fell slightly from 7.65% in August to 7.59% in September 2023. Nonetheless, the 514bp increase in the cost of borrowing since the Bank of England began tightening is still larger than for all corporates (460bp to 6.63%), secured HH borrowing (343bp to 5.01%) an unsecured HH borrowing (246bp to 8.73%).

In short, and to repeat recent messages, UK SMEs continue to face significant systemic and cyclical financing challenges that limit their ability to invest fully in growth, job creation and innovation. Are the UK government and the Bank of England watching carefully enough…?

Little to cheer for UK SMEs

Trends in net lending flows to UK SMEs (Source: BoE; CMMP)

SMEs have been repaying bank loans and overdrafts since October 2022. In September 2023, net repayments totalled -£284m, compared with -£747m in August 2023 and -£1,184m in July 2023 (see columns in chart above).

Cumulative flows in the twelve months to September 2023 increased to -£9.9bn from -£9.2bn and -£8.8bn in August 2023 and July 2023 respectively (see dotted line in chart above).

Trends in net lending flows to key RE sub-sector (Source: BoE; CMMP)

Dynamics in the two sectors that have the largest market shares of total loans – real estate (41% share) and trade (9% share) – matched the overall sector dynamics (unsurprisingly given their size).

Note however that real estate comprises two subsectors: the first and largest involves buying, selling and renting of own or leased real estate; the second (much smaller) involves real estate activities on a fee or contractual basis.

The former is the only sub-sector within SME lending to experience positive 12-month cumulative lending flows (£0.3bn in September 2023). With monthly repayments in four of the past six months, these cumulative flows are slowing sharply now reflecting wider challenges for the UK real estate sector (see chart above).

Trend in the average cost of borrowing for UK SMEs (Source: BoE; CMMP)

The average cost of borrowing for SMEs fell slightly from 7.65% in August 2023 to 7.59% in September 2023 (see chart above). Nonetheless, the 508bp increase in the cost of borrowing since the Bank of England began tightening is still larger than the average costs of borrowing for all corporates (460bp to 6.63%), secured HH borrowing (343bp to 5.01%) an unsecured HH borrowing (246bp to 8.73%).

Changes in the cost of borrowing since BoE tightening began by sector (Source: BoE; CMMP)

Conclusion

To repeat last month’s message – SME’s access to finance is systemically important to the UK economy. Broad-based weakness in lending across all SME sectors or industry groups is concerning, therefore. It supports the hypothesis that SMEs are putting both investment and business development on hold.

In short, current financing conditions are limiting SMEs’ ability to invest fully in growth, job creation and innovation. Are the UK government and the Bank of England watching carefully enough…?

Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.