1. Funding for Lending Scheme update
Banks taking part in the Funding for Lending Scheme (FLS) have cut lending sharply in the last three months according to a report this week.
The lower than expected FLS figures have dampened hopes that the project could help revive economic growth.
The joint initiative between the Bank of England and the government was announced in June 2012, as a way to free up the credit log-jam which some economists say is a big factor behind Britain’s weak economic recovery.
Banks and building societies cut lending by a net £2.425bn between October and December.
The figure compares to an increase of around £1bn in the first months of the FLS’s operation.
Total net lending by banks and building societies taking part in the scheme – which includes all major British lenders apart from HSBC – is now down by £1.502bn since June 30.
The Bank said that the scheme’s benefits will not be fully clear until later in 2013.
“I would not expect to see a return to rising aggregate quantities until we start getting data for 2013 at the earliest,” the Bank of England’s Paul Fisher said.
Comment: It seems the banking industry is still fighting shy of supporting the SME, even with the support of the FLS! On the other hand, mortgage lending appears to be growing, suggesting that the Banks are confident enough in the UK and Global economies that we are not going to see a melt-down in house prices anytime soon.
Last month MPs criticised the FLS for having a “bias” towards mortgages rather than businesses, and expressed concern about reports that businesses were not benefiting from the scheme.
The Federation of Small Businesses also criticised the FLS in December, saying the scheme “does not increase access to credit” and that businesses looking for finance for the first time were now “more likely to be refused“.
2. British Bankers Association update
David Dooks, BBA statistics director at the British Bankers Association, said of the latest datasets:
“The banks approved nearly 80% of applications for loans or overdrafts from smaller businesses and over 90% from medium businesses last year, so from 492,900 applications received, £24.5bn of new borrowing was approved.
”The final quarter typically sees reduced demand for finance with December being particularly slow, while higher cash holding, particularly by smaller businesses and borrowing headroom within agreed facilities tempered needs for new finance”.
Comment: The BBA comments are a very positive spin on what are otherwise disappointing figures where the numbers actually showed the amount of new lending to SMEs was lower in the fourth quarter of last year than in the final three months of 2011. New loans to small businesses fell to £1.5bn, compared with £1.6bn. New loans to medium-sized companies fell to £3.6bn, from £4.1bn.
In total, lending to businesses dropped 5.7% in the year to January. While not as severe as the 6.5% drop in December, it is deeper than the 4.1% fall in January 2012.
3. The Bank of England’s Agents summary of business conditions
The summary confirmed that the cost of bank lending had fallen in recent months, which was partly attributed to the FLS.
It reported a slight easing in credit availability, particularly for the largest firms, but conditions were little changed for firms seen as riskier propositions such as small companies. Little sign of an increase in bank borrowing was reported, which was largely attributed to weak demand for credit. For some businesses, that was reported to reflect a lack of trust in banking relationships.
There were tentative signs that banks’ appetite for forbearance on loans was starting to wane, with some contacts in the commercial property sector reporting a tougher stance being taken by lenders on covenant breaches and sales of assets by property owners whose lenders had signalled a lack of appetite to refinance debt.
Comment: Little change here. The Bank of England’s agents are telling us what we already know – SME business finance is very difficult to come by!
Summary
Whilst we are finding that bank funding remains difficult to come by for the SME, the increasing number of both providers and products in the alternative finance space, means that there are an increasing number of solutions available for both new, and replacement business finance when the existing provider can’t help.
We are also seeing a ‘scattergun’ approach from a number of SME’s when seeking business finance. We would always advise against this approach, as it is invariably seen as a sign of desperation by potential funders, meaning that they will decline the request. It’s always best to approach funding issues on a structured basis, by first determining the type and size of facility needed, and then creating a short list of potential providers, whether it is to back a new acquisition or turnaround finance, to rescue the business.
I would be very interested to hear comments on this article and/or any of your recent experiences in business funding, good or bad. As always I can be contacted at john.thompson@transcapital.co.uk, or on 0845 689 8750.
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