Lending to small businesses to hit six-year low

Banks say that SMEs aren't applying for loans. Businesses claim that the lines of credit have all dried up. Either way, the E&Y ITEM Club forecasts an ongoing lending drought this winter.

by Rebecca Burn-Callander
Last Updated: 19 Aug 2013
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.’

Find this article useful?

Get more great articles like this in your inbox every lunchtime

How to find the right mentor or executive coach

One minute briefing: McDonald’s UK CEO Paul Pomroy.

What you don't want to copy from Silicon Valley

Workplace Evolution podcast: Twitter's former EMEA chief Bruce Daisley on Saturday emails, biased recruitment and...

Research: How the most effective CEOs spend their time

Do you prefer the big, cross-functional meeting or the one-to-one catch-up?

6 rules for leading a remote team

Our C-suite panel share their distilled wisdom.

Showing vulnerability can be a CEO’s greatest strength

Want your people to bring their whole selves to work? You first.

A mini case study in horizon scanning

Swissgrid has instituted smart risk management systems for spotting things that could go wrong before...