Credit Conditions for UK SMEs Remain “Tight”
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Credit Conditions for UK SMEs Remain “Tight”

According to the Bank of England’s quarterly “Trends in Lending” report, credit conditions for the UK’s small business sector remains “tight”, despite an improvement in overall business lending.

– Credit Conditions for UK SMEs Remain “Tight”

– Despite Rise in Overall Business Lending

– Figures Will Boost to Businesses and Politicians

– Looking to Alternative Lenders to Fund Growth

According to the Bank of England’s quarterly “Trends in Lending” report, credit conditions for the UK’s small business sector remains “tight”, despite an improvement in overall business finance and lending. The central bank last month reported that net lending to UK businesses was positive in the three months to May, a reversal of the negative flow recorded in the previous quarter. However, this upswing in lending did not stretch as far as small and medium-sized companies, which suffered a £200 million drop in loans over the same period.

The figures will give some encouragement to business leaders and politicians who have been calling on the banks to improve funding access to businesses. However, despite the implementation of a number of schemes designed to increase lending, banks still seem unable or unwilling to lend the kind of amounts that small businesses typically require. Mike Francis, head of asset finance at Investec, said:

“For most high street banks it is simply not economic to lend sums of less than £50,000. As a result there needs to be a serious shake up in the approach SMEs take towards securing funding. Whether that means turning to alternative finance providers or spreading the cost of asset purchases over a number of years through asset finance, SMEs need to start thinking about different ways of investing in their businesses and managing their cash flow.”

Small Business Ecosystem “Damaged”

Kevin Burrows, a UK financial services leader at PwC, described the support “ecosystem” for small businesses as having been “severely damaged in the crisis”. While the Competition and Markets Authority (CMA) has promised a full-scale investigation into the banking sector, Burrows said that “a broader investigation into the entire system, not just banks, would be even more helpful as there are many bodies that could assist further with the UK’s SME sector.”

As the Financial Times reported last month, the data released by the Bank of England in June showed a strong rise in net lending to business after five years of almost continuous decline. The Bank only began gathering data on loans to non-financial small businesses in 2011 and has recorded a decline in loans almost every month since then. However, despite the overall improvement in lending, business analysts warned against over-optimism, particularly given the continuing restrictions faced by the SME sector. Ian Currie, a director at financial advisors Seneca Partners, said:

“It’ll take more than one month of positive lending figures to turn round the oil tanker. The high street banks remain deeply wary of lending to small businesses, and the annual trend is still downwards. Ever since the financial crisis, many high street bank managers have turned risk aversion into a mantra. With the knowledge that their neck would be on the line for any loans that go bad, some have even discouraged small businesses from applying.”

Alternatives to Bank Lending

With a widespread perception among small businesses that their bank loan applications will be rejected, many are tightening their belts or looking to alternative lenders to fund growth. The BoE’s report notes that more than 8 out of 10 SMEs did not seek finance during the first quarter of this year, a figure that has “increased steadily over time”. Instead, small businesses are seeking to make do by reducing debt and using available cash reserves. Non-bank lending, such as peer-to-peer lending (P2P) or invoice financing, is also becoming “an increasing source of finance” for UK firms, according to the report.

At the same time as business experts urged caution, the Council of Mortgage Lenders (CML) last month revealed that mortgage lending has slowed considerably. New restrictions on mortgage lending, designed to curtail the risk of a housing bubble, could push the country “towards a more conservative lending environment”, according to the CML’s chief economist, Bob Pannell. This, together with the promise of interest rate rises next year, could signal continuing hardship for many small businesses still struggling to survive.