Banks too tight for small businesses

Bank lending to private companies has fallen again. Just what struggling small businesses don't need...

by Dave Waller
Last Updated: 25 Jul 2011

Business owners continue to complain that it's still incredibly hard work to borrow money at decent rates, despite the banks' protestations to the contrary. And new figures from the Bank of England rather emphasise this point: lending to private non-financial companies contracted by £4.9bn in May.

That's not good news for our credit-starved SMEs - or for the economy as a whole. Not so long ago it was touting the positive effects of Project Merlin, designed to encourage banks to lend more. Between January and March, the banks had promised to dole out around £19bn to small firms under the scheme, but the Bank of England reckons they managed only £16.8bn. Earlier this week trade minister Stephen Green, the former HSBC chairman, said banks were ‘behind the curve’ on their Merlin commitment, which he thinks could have a grave impact on the drive to boost exports.

Of course this isn’t great news for SMEs. Dr Adam Posen, a member of the Bank’s monetary policy committee, has just returned from a trip round the country and has been chin-wagging with the select committee, relaying entrepreneurs’ sob stories of being declined for loans. ‘Concerns about funding as well as about inflation are very real,’ he said. ‘They [small and medium-sized businesses] have very few alternatives when banks contract. Banks then only do very gilt-edged – if you will excuse the expression – lending’ (a little economics gag there - ho ho).

But these problems are not being felt across the board. Despite some high-profile retail collapses lately – like Jane Norman and TJ Hughes - the Bank reckons that medium-to-large firms are ‘able to borrow, if needed’. Yet their smaller brethren are still finding things ‘very tight’. Not surprisingly, there's a lot of fear in the air: the Bank’s report suggests that SMEs are refraining from asking for cash because they’re worried that requesting it will make borrowing more expensive or lead to tougher overdraft terms.

Consumers are unlikely to provide the boost the economy needs. Credit card borrowing was at its lowest ebb for more than a year in May, growing by just £34m, while overall consumer credit fell from £539m to £173m, the lowest since January. So it's even more important that the Government persuades the banks to loosen their purse strings.

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