A recent Bank of England report, Trends in Lending, has emphasised the difficulties small to medium-sized businesses are facing in securing financing throughout the UK. The report states that “small and medium sized companies overall were experiencing tighter conditions than large corporates.” This difficulty in securing financing for SMEs has been reemphasised by the recent failure of Project Merlin – a Government scheme that set lending targets to the 5 major UK banks – which missed its lending target by £2.2billion.
Overall, this creates a bleak picture for the UK economy. 60% of the UK workforce are employed by SMEs, and with constant reductions in lending and availability of credit, the number of businesses administrations has risen by 20% from last year, suggesting that the worse is still yet to come.
The Bank of England report states that bank lending has been lower than the repayments made to the Banks themselves, with only £2billion being lent during the first quarter of 2011. Furthermore, the report outlines that banks have been seeking to replace their traditional overdraft facilities, with more expensive credit products, such as factoring. This is extremely worrying for SMEs, who are already facing tough prospects due to the increase in VAT together with reducing consumer spending, which has eroded the profit margins of businesses throughout the UK.
With major UK lenders stating that there will be little change in credit conditions for SMEs in the near future, businesses need to look towards new financing models in order to ensure they are able to continue to operate and grow.
Key takeaways for SMEs:
1: SME’s are cautious about borrowing, because they are not sure of their prospects.
In recent discussions, the major UK lenders reported that trends in applications for new credit and flows of new lending to SMEs have been broadly flat, or negative, over the preceding six months. Consistent with this, BIS data indicated that the value of applications by SMEs for new term loan and overdraft facilities in the six months to February was 19% lower than in the same period a year earlier. Some lenders reported that demand for credit remained muted because SMEs were cautious about business prospects.
2: No significant change in loan pricing
Within the total, estimates of rates charged to small companies have, however, continued to drift upwards, which might indicate that weak economic activity has affected these companies in particular. In recent discussions, however, most lenders reported that the credit quality of SME applications was broadly unchanged over the past six months
Other key messages
- Lending to UK businesses on the whole has contracted.
- SME lending has contracted to a greater extent than large corporate lending.
- There has been no increase in the availability of credit for UK businesses.
- The smallest businesses with turnovers of £1million have faced the full brunt of the lending cuts, experiencing a reduction in lending by 6% as opposed to last year.