Credit squeeze abating but finance costs rising

13 August, 2009

BUSINESSES are finding it easier to obtain new credit for the first time this year, and expect the situation to improve at a similar rate over the coming three months, although the cost of finance has continued to rise, the CBI has said.

According to the business organization’s latest Access to Finance Survey, conducted in July, of those firms seeking new credit lines in the past three months, 27% reported that availability had improved, while 10% said it had worsened. The resulting rounded balance of 18% stands in contrast to May’s deterioration (–20%), and marks the first improvement in credit supply since the survey began in January.

The improvement was mainly driven by the largest firms (those with over 5,000 employees), who saw a strong rise in new credit availability over the past three months, following much more difficult credit access at the start of the year.

However, although the supply of new credit improved slightly (+8%) for small and medium-sized enterprises (SMEs), these firms predict it will remain flat in the coming three months.

Richard Lambert, director general of the CBI, said: ‘Credit availability had been getting more difficult for many months, so these results are positive news. The improvement in access to new credit will help many businesses struggling with the recession, and it is encouraging that its supply is expected to improve in the months ahead.’

He added that while SMEs were still facing challenging credit conditions and had fewer funding options open to them than big companies, he hoped that over time their credit supply would improve too.

‘It is still unclear when bank lending will be flowing freely again, but for many firms credit conditions are at last moving in the right direction,’ he said.

Nevertheless, although new credit has become more available, businesses say they are continuing to find it more expensive. Half of firms saw a rise in the cost of new credit over the past three months and 21% reported a rise of more than 100 basis points.