SME Access To Finance Survey: 2019

5. Demand for finance

Summary

• SME demand for finance had declined over time, indicating firms had increasingly been choosing to rely on their own internally generated resources. This is perhaps a legacy of the 2007-08 recession.
• Different sources place different estimates on SMEs' demand for external finance however they show that only a minority of SMEs seek finance in a given year and that demand for finance increased with business size.
• SMEs in the agriculture/primary industries were more likely than average to seek finance.
• Overdrafts, lease/hire purchase and credit cards continued to be the most sought after forms of finance. The amounts of finance most sought were less than £5,000 and £10,000-£49,999.
• The most common reason SMEs sought new finance was for cash flow purposes, indicating finance tended to be used more for day-to-day needs than for future growth.
• Most SMEs who sought finance only considered one provider and most chose their provider because they had used them before, indicating a reluctance amongst SMEs to consider new sources or types of providers.

Whereas the previous chapter outlined trends in the use of external finance at the time the survey was undertaken, this chapter examines SMEs' demand for external finance, in terms of the proportion of SMEs that sought finance in a given year. It examines the types and amounts of finance sought, the reasons why SMEs sought finance and chose their finance provider.

5.1 Proportion of SMEs seeking finance^[66]

Different sources place different estimates on SMEs' demand for external finance however they show that only a minority of SMEs seek finance in a given year.

SME demand for finance has declined over time, indicating firms had increasingly been choosing to rely on their own internally generated resources - perhaps a legacy of the 2007-08 recession. Demand for finance increased with business size. SMEs in agriculture/primary industries were more likely than average to seek finance.

The SME Access to Finance Survey results are not statistically representative of the overall SME population's demand for finance.^[67] To estimate the proportion of SMEs seeking finance, we therefore draw on two external sources, the BVA BDRC SME Finance Monitor and the UK Government Longitudinal Small Business Survey. The BVA BDRC SME Finance Monitor data relates to 2018 whereas data from this SME Access to Finance Survey relates to the period November 2019 - January 2020. Both sources ask SMEs about their experiences over the 12 months prior to the survey.

The figures for the proportion of firms that sought finance over the 12 months prior to the survey reported in this section are much lower than those reported in section 4.1 on the proportion of firms that were using external finance at the time of the survey in as SMEs could have applied for the finance they used at the time of the survey over several different years whereas the figure for demand represents only applications made in one year.

SME Finance Monitor

Data from the SME Finance Monitor shows that in the 12 months prior to the 2018 survey:

• four per cent of SMEs in Scotland applied for new finance or renewed existing finance
• three per cent had experienced a bank sought cancelation/renegotiation or had themselves sought a cancelation/reduction
• nine per cent had had their overdraft automatically renewed.

In total, 15 per cent of SMEs in Scotland had a 'borrowing event' (the sum of the three types of 'events' above). The proportions in Scotland reporting each type of event were broadly in line with that in the UK as a whole. Over time, the proportion of SMEs in Scotland reporting a 'borrowing event' has declined from 22 per cent in 2012 to 14 per cent in 2016 and has been broadly stable to 2018, indicating firms had instead been relying on internal sources for any finance needs.

The remaining 85 per cent of SMEs in Scotland had not had a 'borrowing event' over the 12 months prior to the 2018 survey. Of this:

• 84 per cent were 'happy non-seekers' of finance, not having had a borrowing event in the 12 months prior to the survey and saying that nothing had stopped them applying. The proportion in Scotland was broadly in line with that in the UK as a whole at 83 per cent. Between 2012 and 2016, the proportion of SMEs in Scotland meeting the definition of a 'happy non-seeker' increased from 68 per cent to 83 per cent and was broadly stable up to 2018. A similar pattern was seen in the UK as a whole.
• Just one per cent were 'would-be seekers of finance', not having had a borrowing event in the 12 months prior to the survey and saying that something had stopped them applying. Over time the proportion of 'would-be seekers' amongst SMEs in Scotland has dropped from 10 per cent in 2012 to 1 per cent in 2017 and 2018.

The reasons SMEs choose not to borrow are explored further in the next chapter.

The Monitor does not provide data by business size band or sector for Scotland however data for the UK is available and is used here to provide an indication of the differences in demand for finance between business size bands and sectors.

The proportion of businesses with a 'borrowing event' increased with business size from 13 per cent of UK SMEs without employees to 32 per cent of medium-sized businesses.^[68]

Base: all SMEs, 18,000 (base minimum: agriculture, 1200)
Source: BVA BDRC SME Finance Monitor, Q4 2018

SMEs in the agriculture (19 per cent) and wholesale/retail (18 per cent) sectors were more likely than average to report a borrowing event (Figure 7 below).

Small Business Survey

Data from the 2019 Small Business Survey, which provides separate estimates for SMEs with and without employees, estimates that six per cent of SMEs without employees in Scotland sought external finance in the 12 months prior to the survey (compared to seven per cent in the UK as a whole), down from 16 per cent in 2012. 14 per cent of SMEs with employees had sought external finance in 2019 (compared to 12 per cent in the UK), down from 28 per cent in 2012, again indicating that firms had increasingly been choosing to rely on internal reserves for any finance needs.

Medium-sized businesses with employees (23 per cent) were more likely than average to have sought external finance in 2018 when 17 per cent of SME employers sought finance (compared to 12 per cent in the UK).^[69]

The Small Business Survey does not provide data by sector for Scotland however data for the UK is available and is used here to provide an indication of the differences between sectors (Figure 8 below). Of those SMEs with employees, businesses in the Primary Industries (21 per cent) and Transport & Storage (20 per cent) sectors were more likely than average to have sought finance. Of those SMEs with zero employees, businesses in the primary industries (12 per cent) were also more likely than average to have sought finance.

Base: all SME employers n=8,406 ; SMEs with no employees n=2,563
Source: UK Small Business Survey 2019

5.2 Types and amount of finance sought

Overdrafts were the most common type of finance sought followed by lease or hire purchase agreements and credit cards

The previous section drew on external sources to examine the proportion of SMEs that sought finance and the proportion that did not. This section uses findings of the SME Access to Finance Survey to consider the types and amount of finance sought among those SMEs that had sought finance in the three years prior to the survey.

The most common types of finance sought by SMEs were overdrafts (60 per cent of SMEs who applied for any type of finance over the three years prior to the survey), lease/hire purchase agreements (47 per cent) and credit cards (27 per cent) (Figure 9). These were also the three most commonly sought finance types in 2012, when the survey was last undertaken. However, while in 2012, a similar proportion of firms sought credit cards and leasing/hire purchase, in 2019, demand for leasing/hire purchase was higher than for credit cards. In 2019, only two per cent sought equity finance^[70] and less than one per cent sought crowd funding including peer-to-peer lending.

Base: SMEs that applied for any type of finance in the three years prior to the survey, 2012 n=631; 2019 n=567
Multiple answers allowed across this question.

The amounts of finance most sought were less than £5,000 and between £10,000 and £49,999

Table 1 shows the amount of finance sought by SMEs who had applied for finance in the three years prior to the survey. The amounts of finance most sought were between £10,000 and £49,999 (26 per cent) and less than £5,000 (24 per cent). No businesses sought between £2 million and £5 million and only one per cent sought more than £5 million.

Table 1: Total nw finance sought in the three years prior to the survey

	Percentage of SMEs who applied for finance
Less than £5,000	24%
£5,000-£9,999	4%
£10,000-£49,999	26%
£50,000-£99,999	18%
£100,000-£499,999	13%
£500,000-£999,999	2%
£1m-£1,999,999	5%
£2-£5m	0%
£5m+	1%
Don't know/Refused	7%

Base: SMEs who applied for finance in the three years prior to the survey, 567

5.3 Reasons for seeking finance and choosing finance provider

The most common reason SMEs sought new finance was for cash flow purposes, indicating finance tended to be used more for day-to-day needs than for future growth

Whereas the previous section considered the types and amounts of finance SMEs had sought, this section considers the reasons they sought finance and why they chose the finance provider they most recently used.

SMEs who had sought finance in the 12 months prior to the survey^[71] were asked the reason they sought finance (Figure 10). The most common reason was to help with cash flow, cited by 42 per cent of SMEs who had sought new finance (up from 28 per cent in 2012). There was a significant drop in the proportion of SMEs that sought new finance to fund other expansion/ growth (10 per cent, down from 28 per cent in 2012).

Base: SMEs seeking new finance in 12 months prior to survey, 2012 n=168; 2019 n=212
Multiple answers allowed across this question.

Most SMEs who sought finance only considered one provider and most chose their provider because they had used them before, indicating a reluctance amongst SMEs to consider new sources or types of providers.

Most SMEs (61 per cent) who sought new finance over the 12 months prior to the survey only considered one provider. 27 per cent considered more than one provider for new finance and 12 per cent did not know.

The most common reason SMEs chose the finance provider they last used was because they had used them before, cited by 54 per cent (Figure 11).

Base: SMEs seeking new finance in 12 months prior to survey, 212