Access to finance for small businesses post credit-crunch has become a contentious topic and the fear of a reduced lending environment has turned the issue political. Several initiatives have been put forward to provide funding that will fuel growth in the UK’s small and medium-sized enterprise. The sector considered key in driving job creation, innovation and growth in the economy.
One example is the Business Growth Fund which was set up in partnership with the banks but had taken almost a full year to fund its first company.
The high profile Project Merlin agreement between the major high street banks and the government to increase lending to small businesses has been more controversial.
The banks say that they are lending but the figures they themselves published have been unclear. The Merlin figures include unused credit facilities, effectively the credit that a business is able to borrow and not the amount actually borrowed. Additionally each bank has their own definition of an SME and so their figures are masking the true amount of cash being channelled to the smallest businesses.
The official Q3 lending figures from the Project Merlin agreement were published by the Bank of England. The whole lend amount published seems to indicate that the banks are only £1 billion behind their targets. The break out figures for SME lending, however, reveal that lending to SMEs has fallen quarter on quarter by 8.3 per cent.
So small businesses are finding it harder to obtain finance but crucially the formal agreement did not establish any sanctions to ensure that the lending targets are met and does not deal with another point – the cost of borrowing.
The Autumn statement is expected to see the government introduce ‘credit easing’ measures through subsidised loans. A move that will enable banks’ to borrow from the money markets at lower interest rates with the stipulation that any money obtained in this way must be lent to small businesses.
But this is a move that will not necessarily increase net lending, it can only hope for it. The current debt crisis in the Eurozone is making it particularly harder for banks to borrow regardless.
And what about the future? Xavier Rolet, CEO of the London Stock Exchange recently highlighted that bank lending will continue to fall as new legislation is implemented in the coming years. Basel III for example will force banks to increase their capital thresholds and this will reduced their capacity to lend. In Mr Rolet’s words "Bank lending is not the right tool for financing SMEs".
Changing the lending landscape through innovation and competition
The top five high street banks make up 85% of the small business banking market. The financing landscape is extremely concentrated and more competition is needed in financial products to increase access to competitively priced funding to small businesses. The government should look to embrace innovation in the private sector, much like President Obama did with crowdfunding in the United States, and this kind of financial innovation is currently happening in the UK.
A number of emerging models are providing credible alternatives to traditional bank finance and making massive strides in changing the financial landscape in the UK. Click here to view our presentation: “Alternative sources of Funding”.