Small business lending to become an even bigger problem?

Banks have threatened to raise the cost of borrowing for small businesses. Given the number of complaints we hear that it's too expensive already, that's less than ideal.

by Emma Haslett
Last Updated: 25 Jul 2011
What do you do when your customers complain that the cost of your product is too high? Presumably, the answer isn’t ‘raise prices even more’. But according to a report by the Bank of England, UK banks are planning to do exactly that, raising the cost of borrowing for small businesses over the next three months or so, despite the fact that SMEs have spent the last few years vociferously complaining that they can’t afford to borrow in the first place. Time for the Government to start cracking the whip a bit harder?

When the banks missed the small business lending targets set for them as part of Project Merlin, they said it was because there wasn’t enough demand for borrowing among SMEs. So it might seem a little odd that they’re responding in a way that will surely depress demand even further. But banks say there are other factors to consider: firstly, the quality of applicants’ credit scores has gone down, which is discouraging banks from lending, and thus reducing the number of potential providers – which in turn allows those still in the market to charge more. What’s more, they complain, keeping up with regulatory changes has increased overheads, while their own cost of borrowing has also apparently gone up. But the long and short of it is: small businesses are likely to get an even rawer deal over the next few months.

And just to really twist the knife, the banks are actually planning to lower the cost of credit for large and medium companies – because there’s more demand, and thus more competition among banks to lend to them. Not a peep about the cost of regulatory changes there…

Business secretary Vince Cable has, at least, acknowledged that the situation is threatening to become very bad indeed. ‘I’m a cracked record publicly worrying about this problem,’ he said. The figures for the first quarter of Project Merlin, released in May, weren’t encouraging at all: while banks were found to have largely hit their targets when it came to big business lending, they fell short by just over £2bn on small business lending. Cable’s advice is for businesses to shop around: Lloyds, for example, has so far met its SME lending targets, while RBS is still a way off. And there are some new entrants coming into the market (like Swedish bank Handelsbanken, according to the Telegraph).

But what can the Government actually do? Until now, it’s tried to get its way through firmly-worded threats. But perhaps this won’t be enough; maybe Cable will actually have to make good on his threat to bring in some sort of failure-to-lend tax, even at risk of driving disgruntled banks out of the country…

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