WHAT IS THE SOLUTION TO THE CRISIS IN SME BANK LENDING?
BY MARKETINVOICE
FINANCE BLOG – MYINTRODUCER.COM
PUBLISHED MAY 3RD 2012

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For small and medium sized enterprises (SMEs) in the UK, banks are the main source of finance, with four of the main high street banks accounting for about 80% of the business banking market. The recent Bank of England report released earlier this month shows negative growth for SMEs. The data released includes a three-year report showing that lending fell sharply from early 2008 and has actually weakened even further since mid-2009.

Due to a number of factors there could be a potential credit gap of up to £191 billion over the next 5 years, according to the Government appointed Breedon Report. So what are the reasons that have contributed to making traditional sources of working capital harder to acquire?

Project Merlin figures released in February exposed that banks did not reach the pledged target that had been agreed when the Government scheme was launched over a year ago. £76 billion was supposed to be leant to small businesses; yet when the figures were revealed it showed that the banks collectively fell just over £1 billion short of the agreed target, with the state-backed RBS missing their quota by some distance. All this said; UK banks still lent £74.5 billion to SMEs last year.

Further compounding the lending problem is the Basel III agreement.
Currently being phased in by the banks, Basel III is the global framework governing the regulation of bank capital, liquidity and leverage in the wake of the world financial crisis. Under Basel III banks are encouraged to hold more capital and therefore lend to fewer high-risk ventures. Lending to SMEs is weighted as relatively high risk, and when combined with rising capital requirements will result in an unreasonably high cost of capital for banks when lending to such businesses. This could mean a gradual shift of their entire business models away from SME lending. Sadly this is the antithesis of what SMEs need to grow and expand.

The Chancellor’s Budget for 2012 announced some measures to try and encourage lending and business growth. One action taken by the Government that pleased MarketInvoice was the commitment to allocating £100 million to invest through non-traditional channels and platforms. The fact that alternative financing options were even mentioned in the budget is really heartening and shows that a large proportion of British businesses want to expand and create jobs, but are not being satisfied by the current range of traditional banking products.

The budget also launched the National Loan Guarantee Scheme. The NLGS will guarantee £20bn through bank loans to small and medium businesses. The scheme will help businesses access cheaper finance, by reducing the cost of borrowing under the scheme by 1 percentage point. Four major banks, Barclays, HSBC, Santander and Aldermore, have embraced this credit-easing scheme. This is a step in the right direction for small businesses as it looks like the Government is trying to get banks to start lending to more SMEs.

The Enterprise Finance Guarantee (EFG) is a loan guarantee scheme intended to enable additional bank lending to viable SMEs lacking adequate security for a normal commercial loans. The reforms to the EFG announced by the Chancellor will make it easier for SMEs to access guarantees. The reform sees the Government acting as guarantor for bank lending and thus giving credibility to small business loan applications, the Government will underwrite 75% of the loan.

All the Government measures are a step in the right direction, but SME growth ultimately lies in the hands of the private sector. There is no silver bullet to solve the SME liquidity crunch, which is why MarketInvoice helped co-found the Next Generation Finance Consortium. The NGFC is a movement comprising alternative funding providers (including invoice finance, crowdfunding and peer-to-peer lending.) Its aim is to educate and help companies understand the evolving financial landscape and to bridge the gap between high growth businesses and investment. “Bashing the banks” is so last year, it is detrimental to the financial lending cause and more than that it is important that there is a link between new and traditional lending models – a good dialogue to ensure business owners can find the right type and source of finance for their individual needs.