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Small businesses bear the brunt of slowing bank lending

London, UK (20/08/2010)

LONDON (Management Today) Business lending by banks dropped £3.5bn in June - and SMEs suffered the most. Surprised?

The Bank of England said today that business lending fell by £3.5bn in June. And guess who bore the brunt of that? That’s right, small businesses – who, unlike their larger brethren, don’t really have other sources of funding to fall back on. The banks argue that there simply isn’t much demand from this end of the market – and while there may be some truth in that, the sky-high interest rates currently on offer aren’t exactly helping. The Forum of Private Business also reckons that SMEs are not getting a fair deal on property valuations when they apply for asset-backed loans. Not particularly encouraging, is it?

Bank lending matters, because it helps companies not only manage cashflow but also invest for growth. So the BoE’s rhythmically-title ‘Trends in Lending’ report doesn’t make for happy reading: between March and June, overall lending dropped by 3.6%. That’s a much bigger drop than 1.1% drop between January and March, and means that it’s now fallen by 8.1% in the last 12 months. While you can understand businesses wanting to pay down debt – like the rest of us – this lack of investment may well translate into slower growth for the economy as a whole.

The other problem is that smaller firms are hit harder by this slowdown – because unlike larger firms, they can’t just arrange a quick asset sale or bond issue to get their hands on some cash. And according to the Bank’s figures, credit spreads (i.e. the profit the bank makes on the loan) are getting smaller for larger firms, but staying about the same for smaller firms. With money so expensive to borrow, it’s hardly any wonder that the demand isn’t there.

The banks continue to protest their innocence, arguing that they can’t lend more if people don’t want their money – and that lending targets would only encourage bad credit decisions (Barclays has already stuck its head above the parapet on this one). But they may not be entirely blameless: for instance, the FPB reckons banks are routinely under-valuing the properties small firms try to use to secure their loans. This is a big deal, since 74% of business loans are apparently secured against property (either commercial or residential). And if companies have to resort to unsecured loans instead (because they can’t get a decent valuation) they could end up paying more than twice as much in interest.

Whatever the banks’ protestations, it’s clear that the credit market is still not functioning properly for small firms. Presumably the Government is best placed to correct this failure – although we’re not totally convinced that set-in-stone lending targets will solve the problem…

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