Forget the banks - we need other sources of cash, say SMEs

The best way to boost the supply of credit is to promote non-bank lending, says the FPB.

Last Updated: 31 Aug 2010

Are SMEs still having trouble with their banks? Our survey last week cast some doubt on the extent of the problem, but the Forum of Private Business trade body remains in no doubt that perfectly good firms continue to have trouble squeezing credit out of the banks. The obvious answer, they say, is for the Government to start pushing other types of lending, like bonds, invoice financing and venture capital. It’s certainly true that more competition between lenders should result in a better deal for borrowers – as long as we don’t end up using public money to subsidise unsound businesses…

The FPB’s latest broadside follows the release this week of a report by the House of Commons Public Accounts Committee, which revealed that the banks – particularly state-backed RBS and Lloyds – have failed to live up to their promises when it comes to SME lending. Both are lagging well behind their business lending targets (of £16bn and £11bn respectively). And according to the FPB’s stats, availability of bank credit is still the main bar to any SME trying to raise money.

The answer, the trade body suggests, is to cut the banks out of the process – to promote ‘counter-cyclical’ alternatives like corporate bonds, leasing, invoice financing, supply chain credit and venture capital. At the moment, all of these are much more readily available to larger businesses. ‘The recent crisis has made it clear that access to credit should be less dependent on the economic cycle,’ it says. ‘We believe the Government needs to put credible alternative sources of finance in place which will reduce the banking industry’s monopoly on lending.’

Of course, the banks take a different view; they suggest that they’re doing their best to lend, but they can’t hit their target because some businesses are choosing to pay down debt, some just don’t want to take to borrow more, and others just don’t represent a credible borrowing proposition (presumably we don’t want our banks to start lending money to people who almost certainly can’t afford to pay it back – after all, that’s what got us into this mess). Free marketers would presumably also argue that the Government shouldn’t be getting involved in the distribution of finance.

In truth, both sides probably have a point; banks are reluctant to repeat their past lending mistakes, while stable businesses’ appetite for credit has probably gone down. But as long as the Government can remain at arm’s length from the process, it surely wouldn’t hurt to try and give SMEs a few more options, at least?

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