Lending to small businesses to hit six-year low

Cash-strapped businesses beware: loans will be in short supply until 2016 at the earliest. This is the unhappy conclusion reached by E&Y’s esteemed ITEM Club, an economic think tank that uses the Treasury model to independently road test government forecasts. And things are going to get considerably worse before they get better, it posits, with loans drying up even further in the last quarter of this year.

For 2012 as a whole business lending will fall by 4.6% to £429bn, the fourth consecutive annual decline, which takes the number of loans issued to businesses down to its lowest level since 2006. This despite the government’s attempts to open the lines of credit to small firms through its Funding for Lending scheme and the forthcoming business bank, championed by Vince Cable.

‘Government schemes to increase lending may help a lucky few but, as banks are encouraged by regulators to store up more capital and to look again at their forebearance policies and so-called bad-loan books, most small businesses are going to continue to feel the squeeze,’ says Carl Astorri, senior economic adviser to the Item club. ‘We expect the business bank will have to compete for projects that are commercially viable, and so we do not think the scheme will have a tangible impact on the economy.’

SMEs face a estimated funding gap of £19bn over the coming year, according to ITEM, but the BBB will have a capacity of only around £10bn. And that’s if the business bank even manages to hit its £10bn target. In a pretty sad indictment of Cable’s brainchild, which has already been subject to much criticism from financial pundits, Astorri adds: ‘The figures suggest that the BBB’s lending capacity could be exhausted in less than a year.’