UK SME Card Usage Stays Strong
Publication Date: August 2011
UK SME demand for credit may have eased in recent months, helped by recovering economic fortunes; nevertheless, business credit card usage in the UK remains one of the primary ways of obtaining financing, as Victoria Conroy reports.
With around two million corporate credit and charge cards in the UK and a market well-served by several of the world's leading banks, UK SMEs have no shortage of options when it comes to payment cards. In fact, the UK small business credit card market is one of the strongest in Europe. While the recession severely restricted the availability of credit, which hampered SMEs' expansion plans, economic recovery also means that SMEs' demand for credit has dissipated in the last few months, if recent surveys are anything to go by.
UK Business Lending Trends
As of the end of 2010 there were around four million SMEs in the UK, defined as having fewer than 250 employees. Data from the British Bankers Association (BBA) shows that as of February 2011, there were an estimated 510,000 term loans (within some 3.9 million small business banking relationships), with a total outstanding value of £42.2 billion (US$69.3 billion) and overdraft borrowing standing at £7.6 billion (US$12.4 billion).
The level of total borrowing as of February 2011 (£49.8 billion, or US$81.8 billion) reflects a return to pre-financial crisis levels in 2008, as businesses have paid down debt and built up reserves in response to the financial crisis. The aggregate value of small business current and deposit accounts, restated on the basis of refreshed data from banks up to February 2011, is strong at £56.8 billion (US$93.3 billion), and the first two months of the year saw a continued monthly rate of around 50,000 small businesses establishing new banking relationships by opening their first account from a business product range. The BBA's data shows that lending trends appear stable, although it noted credit demand from small businesses fell sharply in the first quarter of 2011.
In its July 2011 Trends in Lending report, the Bank of England noted that the amount of lending to UK businesses contracted by around £4 billion (US$6.5 billion) in the three months prior to May, although this was partially offset by an increase in April, the first positive monthly figure for net lending since November 2010. However, credit availability remained broadly unchanged for businesses, according to lenders in the Bank of England's 2011 Q2 Credit Conditions survey. As is often the case, larger firms were generally able to access bank lending if required, but opportunities for smaller firms remained more variable.
Card Usage Trends
Despite demand for credit easing off, UK SMEs are still enthusiastic users of business credit cards. Recent surveys about SME business card usage indicate that on the whole, business credit cards are the most widely used financing tool for small and medium-sized businesses. A 2010 study, updated from data published in 2004 and 2008, by Warwick Business School found that UK SMEs spend in excess of £1.8 billion (US$2.9 billion) on business credit cards. The study, which was based on a sample of 2,500 companies, found that 55% of SMEs used business credit cards, 53% had overdrafts, 24% used term loans, and only 3% used equity finance during the period 2001-2004.
Source: Warwick Business School
According to the study, small businesses were generally able to find the financing they needed but often failed to secure the best possible terms for their borrowing. There is also a need for SMEs to have a safety net against short-term problems, reflected by the £4 billion (US$6.5 billion) net positive cash position of SMEs, who were holding £92 billion (US$151.2 billion) in total deposits, compared with £88 billion (US$144.6 billion) that they owed in loans.
Most of the business credit card spending by SMEs is for day-to-day bills, such as travel expenses and raw materials, although 12% of the study's respondents said they used their corporate cards to buy equipment and vehicles. Only a small proportion of the money spent on business credit cards is left outstanding at the end of the month. Businesses using personal credit cards pay off an average of 79% of these debts in full each month. For business credit cards, the proportion is 95%.
Although the UK small business lending market is dominated by the big four banks – HSBC, Lloyds TSB, Barclays and Royal Bank of Scotland, which serve a total of 82% of all SME banking customers in England and Wales – UK SMEs are not averse to shopping around for a better deal. Only 2% of SMEs change banks each year, but one in three expressed some dissatisfaction with their bank charges, which are on average £51 (US$83) per month. The average SME has been with their main bank for 15 years. Around 7% were considering changing banks, and 29% said they would move if approached by another financial services provider.
Another survey from Hilton-Baird Financial Solutions, which was published in February 2011 and drew responses from 700 UK SMEs, found that 44% of respondents use credit cards as working capital, despite the relatively high interest rates charged. However, this received a mixed reaction in small business circles, with insolvency practitioners Business Rescue Service describing the finding as "concerning at a time when we are seeing so many cases of company insolvency." According to Business Rescue Service, the problem is not that businesses should never use any form of credit – it's more the consequences of doing so either habitually or on a larger scale as a form of primary funding.
The newly launched SME Finance Monitor from BDRC Continental, published in July 2011, found that around 51% of surveyed SMEs are using external financing and that 19% of SMEs have had a "borrowing event" involving an overdraft and/or loan in the past 12 months. Almost all SMEs said they held some credit balances, either in deposit or current accounts. Based on those giving an answer, two-thirds held small balances of £5,000 (US$8,219) or less (63%), but this was because of the lower credit balances held by smaller SMEs. Among the largest SMEs, half had credit balances in excess of £100,000, or US$164,389.
Overall, 30% of SMEs had used external finance in the past five years and were using something now. Around 2% had used something in the past, but not now, and 21% had not used external finance in the past but were using it now. Almost half (47%) had neither used external finance in the past nor were they using it now, and this ranged from half of one-man bands to just 15% of the largest SMEs.
In relation to financing methods, credit cards ranked behind overdrafts, which were the most popular method of financing, and this was applicable across SMEs of varying sizes.
Source: SME Finance Monitor
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Only a minority of SMEs had applied for other forms of finance during this time, but most of those that had applied had been successful, with business credit cards receiving a 92% success rate in approvals.
Liquidity and Working Capital Trends
UK SMEs are generally in a healthy state as far as finances are concerned. In their 2010 SME credit and finance survey, the Association of Chartered Certified Accountants (ACCA) and the Confederation of British Industry (CBI) found that although the refrain "cash is king" was common throughout the recession, it is even more true in the recovery, with cash, liquidity and working capital needs now the main drivers of SMEs' demands for finance. Those with strong cash positions are less likely to need finance and more likely to obtain it if they apply.
The ACCA/CBI survey also found that in line with previous research findings, half of all SMEs surveyed (50%) reported that they had sought new credit or loans on commercial terms, and a larger share (62%) reported they had sought some form of additional finance, trade credit or funds over the last 12 months. Bank overdrafts were the most commonly applied-for type of credit, followed by credit from suppliers and bank term loans.
If anything, these trends mean business credit cards in the UK will face more competition from other forms of financing, including a shift towards trade credit (within agreed terms) and term loans, and away from overdrafts, a move which is already underway. It appears that larger SMEs are more likely to make this shift, which implies a lower amount of working capital, a higher amount of cash, or both.
But UK banks are certainly not being complacent about serving the UK SME market. In April 2011, Barclays announced the acquisition of MBNA Europe 's UK small business credit card portfolio, consisting of approximately 60,000 accounts and £130 million (US$213 million) of outstanding balances as of February 2011. And with this large segment still vastly underpenetrated by payment cards in general, banks in the UK will be ramping up their efforts to recruit more SMEs as card customers in the months to come.