Sustained
attempts to stimulate the flow of credit to small businesses isn’t
working
Much of
the blame for the credit crisis has been laid squarely at the feet
of the UK’s financial institutions. Many businesses argue that the
tight underwriting frameworks adopted by the banks are preventing
even the most viable of businesses from accessing urgently needed
funding.
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The Bank of England
has reported that traditional bank lending to UK businesses
declined in each quarter of 2011. When combined with other relevant
data, there’s arguably a strong case in support of this belief.
However, this is not the only point of view.
The banks say
£214.9bn (€267.9) was provided to UK companies in 2011 under the
much-maligned Project Merlin agreement, thus exceeding their £190bn
target. They also lent £74.9bn to small businesses, just £1.1bn –
or 1.4% – short of their target. So, if supply isn’t the issue,
perhaps it’s worth taking a closer look at the level of
demand?
The Bank of
England’s Credit Conditions Survey examined the supply of credit to
individuals and businesses during Q1 2012 and found demand had
fallen from Q4 2011.
There are several
possible explanations. One is that businesses are content with
their current levels of credit. Another could be that many are
cautious about taking on more debt given the precarious economic
outlook. But the third and quite possibly most logical reason is
that business owners simply expect their funding applications to be
turned down and instead look elsewhere. Some report existing
facilities being reduced – and even withdrawn in some extreme
cases.
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By GlobalDataI read a comment in
a newspaper recently suggesting the prolonged downturn isn’t down
to the banks’ perceived unwillingness to lend at all. Rather, it is
a consequence of a legacy from the pre-crisis years derived from
ill-advised property finance facilities.
While that’s one
potential factor behind the funding challenges, the reality is that
the issues are really a result of a combination of just about
everything. Supply and demand is a relationship that will never
cease to exist as its characteristics mean that one will never
truly trump the other. This is arguably equally true for the flow
of credit.
The government’s
sustained attempts to stimulate the flow of credit to small
businesses through a variety of schemes are interesting – Project
Merlin, the Enterprise Finance Guarantee scheme, the National Loan
Guarantee Scheme, the list goes on – but their impact remains the
same. Giving the banks more scope to lend through traditional means
is simply failing to have the desired results, whether due to
supply or demand.
Isn’t it about time that more flexible, tailored options
such as asset-based finance were considered and introduced to more
business owners as a viable solution? We think so, and we hope the
government takes note and pushes its benefits to businesses of all
sizes.
Evette Orams is managing director at Hilton-Baird
Financial Solutions
