Credit eases, but at a price

Aug 18 2009 Sarah Green, The Journal

THERE are signs the credit squeeze is starting to abate. Our latest Access to Finance survey has shown that for the first time this year, businesses are starting to find it easier to obtain new credit.

UK companies will be looking to roll over £40bn finance this year, so availability of affordable credit will be crucial to economic recovery.

Our report shows the availability of new credit has increased moderately in the three months to July, and a similar rise is expected next quarter.

The increase was particularly noticeable for the largest companies, although there was also a modest increase in availability of new credit for smaller and medium-sized firms.

However, it isn’t all good news. Current financing conditions continue to have a marked negative effect on staff numbers and capital investment as the cost of finance has continued to rise. A net 44% of firms said capital investment had suffered as a result of financing conditions, while a balance of 37% said staff numbers had been hit.

Smaller firms are still facing challenging credit conditions and have fewer funding options open to them than big companies.

SMEs reported a moderate decline in availability of credit lines and expect a similar tightening in the next three months. It is crucial their access to credit improves, and this is something we hope to see.

Another issue CBI’s survey highlighted was that there has again been a marked deterioration in the availability of trade credit insurance.

In a region such as the North East, which is a net exporter, trade credit insurance is a critical issue for many firms. So the news that a balance of 57% said availability of trade credit insurance had worsened is sobering. Available credit limits, cost of insurance and the speed and administrative burden of renewing insurance all deteriorated at an even sharper rate than in May's survey.

This is despite the Government extending the scope of the original trade credit insurance top-up scheme. While there is undoubtedly still more the Government could do, including some form of export credit support scheme, it is important businesses look to reduce their reliance on credit insurance.

Access to finance is key to ensuring the road to recovery for the UK economy. The CBI will continue to monitor the situation with member surveys and use this intelligence to inform policy on this critical issue.

Sarah Green is regional director, CBI North East