Lending to small businesses drops by £4bn

The Bank of England has admitted that the amount lent to small businesses during the three months to November has actually contracted. Back to the drawing board, Vince?

by Rebecca Burn-Callander
Last Updated: 19 Aug 2013

Oh dear. The Bank of England's Funding for Lending wheeze is not doing at all well. According to the official data from its latest Trends in Lending report, the stock of lending to businesses fell by around £4bn in the last quarter to November 2012.

Business secretary Vince Cable will not be at all pleased. He launched the Funding for Lending scheme last July. A scheme that gives cheap credit to banks on the condition they lend it at at equally favourable rates to consumers and businesses. What could possibly go wrong?

Well, according to th BoE, the problem lies in the lack of demand for corporate credit. Businesses simply don't want the money. They are spooked by the current economic climate and aren't investing in new plant or infrastructure, so why would they borrow, even at favourable rates? 

'The contraction in lending to businesses overall was reflected across all firm sizes, with the annual rate of growth in the stock of lending to both small and medium-sized enterprises and large businesses negative over this period,' said the BoE report. Nobody wants our money, in translation.

The Bank reckons that another reason for the lack of interest is that capital markets are providing an alternative source of funding for larger companies. The report found that net bond issuance by UK businesses was positive in the three months to November, in contrast to the falling net lending figures by UK-resident banks and building societies across the period.

However, while there aren't all that many loans being taken out, those who do need to borrow are getting fantastic rates. Between the Funding for Lending scheme and increased competition between banks, corporate loan pricing is getting more and more competitive.

Matthew Fell, CBI director for Competitive Markets, says: 'Signs that lower borrowing costs are beginning to reach firms are encouraging and show that Funding for Lending is beginning to make an impact. However, weaker demand for finance among small and medium-sized businesses indicates that they are still lacking confidence to invest, so raising awareness of available schemes is crucial. The British Business Bank must be put into action without delay to ensure government support is visible and reaching businesses that need it most.'

Ah, the British Business Bank. Cable's other baby. Will it fare any better than its financial sibling?

At last count, Funding for Lending has released £500m in additional loans into the economy. The British Business Bank should have funds of around £1bn to lend, which gives it double the clout. Let's just hope that the businesses want to borrow, eh?

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