For many of our clients and readers, access to business finance remains one of their biggest concerns going into 2013. As we have mentioned in previous blogs, the paradox of banks not lending and SMEs not borrowing leads to an increasingly downward spiral of funding.
The government is trying to do something about it with initiatives like the Funding for Lending scheme and the Business Bank, but progress is slow. Availability of finance for SMEs continues to decline, as we saw in recent evidence from the Bank of England’s own Agents report published on 21st November.
The highlights:
- Some business lenders are still tightening terms.
- Availability of overdrafts continues to reduce for SMEs
- Banks prefer asset-backed lending and are seeking additional personal guarantees
- A number of firms have seen a further deterioration in debtor days
- Some lenders have begun to make offers at lower interest rates but awareness of such improvements remains low
- Some smaller firms are very reluctant to borrow.
- It will be well into 2013 before the Funding for Lending scheme has any material effect on SME lending
Indeed, a report in The Times on 3rd December showed that while a number of banks have taken advantage of the Funding for Lending Scheme, it has failed to produce the additional lending to business that had been hoped for:
“A flagship lending scheme devised by George Osborne and Sir Mervyn King misfired in its first three months as top banks drew on the cheap funding but failed to pass the benefits on to their customers.
Six banks borrowed £4.4 billion of low-cost money from the Bank of England in the three months to September, yet the loan books of three of them, including the state-controlled Royal Bank of Scotland and Lloyds Banking Group, shrank in the same period’.
Shouldn’t the non-bank funders be filling this gap?
It is very surprising to me that the asset based lending (ABL) market has not taken up more of the slack in this funding gap. At a time when bank funding for the SME is proving highly elusive, the ABL market is flat, as reported by ABFA, the industry body! I think there are a number of reasons for this:
1. The Lending Paradox, in which reduced lending leads to reduced demand for business funding.
2. The industry has suffered some bad press over the past 12 months
Comment: Whilst the more extreme practices by some rogue elements leave something to be desired, this does not mean that the whole industry should be tarnished with the same brush! There is a danger of over-reaction here in terms of introducing new regulation. As Eric Anstee, a former chairman of the Institute of Chartered Accountants in England and Wales, recently warned, “excessive intervention” from regulators would further “stifle the flow of funding” to small companies that already complain about access to bank finance. It seems we do run the risk of ‘throwing the baby out with the bath water’!
3. Lack of awareness of the availability, scope and scale of non-bank ‘alternative’ finance
Comment: The independent asset based lending market is very keen to expand its market share by attracting more of the banks’ traditional overdraft and term loan business. This area of business funding has never been more relevant to the SME seeking new or additional finance.
Alternative finance update
The so called ‘alternative’ funding market is growing apace. To this end, the Department for Business Innovation and Skills has just pledged £55 million of Government funding, through a scheme called the Business Finance Partnership, to peer-to-peer lenders and other finance suppliers.
The first four successful bidders for the Business Finance Partnership funds include:
Funding Circle – this peer-to-peer lender enables British people to lend money directly to small businesses in the UK and offers a faster and more efficient way for businesses to borrow finance. It will receive £20 million.
Zopa – this website allows investors to lend directly to small businesses, offering a more efficient way of helping firms to access loans. It will receive £10 million.
Business Secretary Vince Cable said:
“Small and medium sized businesses need access to a diverse range of finance options, including non-bank lending. These new forms of finance are still small in scale today but they should, over time, bring additional choice and greater competition to the lending market.
“Today’s funding announcement is just the type of help that the new Business Bank will offer. The bank, which will be operational by 2014, is being designed to tackle these long-standing, structural gaps in the supply of finance for SMEs.”
Business Bank update
The new Business Bank was announced by Vince Cable in September. It is designed to provide small and medium-sized businesses with an alternative source of finance.
£1bn of taxpayers’ money will be supported by private partners to provide £10bn of lending capacity, Mr. Cable said. “The target market is medium-sized companies that want to borrow for longer than five years. We want to create a facility for companies to access what we call patient capital.”
Three months later, in his Autumn statement, the chancellor announced, “We’re creating a new Business Bank and providing it with £1bn of extra capital which will lever in private lending to help small and medium-sized firms (SMEs) and bring together existing schemes”.
It is proposed that more details about how the bank will operate will be given later in December!
Comment: If this new bank is supposed to be a source of much needed credit to SMEs, it seems that remarkably little progress has been made. One of the reasons for this is likely to be the reluctance of the big banks to be supportive to what is in effect a disruptive strategy by the government. Whilst you have to start somewhere, it could be so long before this new bank opens its doors that it will have little or no effect on our current funding crisis.
What do you think?
Image by: Philip Taylor PT