Small businesses bear the brunt of slowing bank lending
London, UK (20/08/2010)
The Bank of England said today that business lending fell by £3.5bn in June. And guess who bore the brunt of that? Thatís right, small businesses Ė who, unlike their larger brethren, donít really have other sources of funding to fall back on. The banks argue that there simply isnít much demand from this end of the market Ė and while there may be some truth in that, the sky-high interest rates currently on offer arenít exactly helping. The Forum of Private Business also reckons that SMEs are not getting a fair deal on property valuations when they apply for asset-backed loans. Not particularly encouraging, is it?
Bank lending matters, because it helps companies not only manage cashflow but also invest for growth. So the BoEís rhythmically-title ĎTrends in Lendingí report doesnít make for happy reading: between March and June, overall lending dropped by 3.6%. Thatís a much bigger drop than 1.1% drop between January and March, and means that itís now fallen by 8.1% in the last 12 months. While you can understand businesses wanting to pay down debt Ė like the rest of us Ė this lack of investment may well translate into slower growth for the economy as a whole.
The other problem is that smaller firms are hit harder by this slowdown Ė because unlike larger firms, they canít just arrange a quick asset sale or bond issue to get their hands on some cash. And according to the Bankís figures, credit spreads (i.e. the profit the bank makes on the loan) are getting smaller for larger firms, but staying about the same for smaller firms. With money so expensive to borrow, itís hardly any wonder that the demand isnít there.
The banks continue to protest their innocence, arguing that they canít lend more if people donít want their money Ė and that lending targets would only encourage bad credit decisions (Barclays has already stuck its head above the parapet on this one). But they may not be entirely blameless: for instance, the FPB reckons banks are routinely under-valuing the properties small firms try to use to secure their loans. This is a big deal, since 74% of business loans are apparently secured against property (either commercial or residential). And if companies have to resort to unsecured loans instead (because they canít get a decent valuation) they could end up paying more than twice as much in interest.
Whatever the banksí protestations, itís clear that the credit market is still not functioning properly for small firms. Presumably the Government is best placed to correct this failure Ė although weíre not totally convinced that set-in-stone lending targets will solve the problemÖ
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