London, UK (22/05/2009)

The Bank of England’s latest ‘Trends in Lending’ report has delivered a grim reality check for anyone who thought financing was getting easier: a new study of lending to businesses with turnover of less than £25m has found that applications and approvals are down, while spreads (the difference between bank rates and the base rate) and fees are still rising. In other words, far from things improving, credit conditions actually seem to be getting worse. The British Bankers Association recently reported that lending to small firms was improving marginally, but it seems we're not out of the woods yet.

This month’s BoE report cites new figures gathered by BERR (or the Department for Business, Enterprise and Regulatory Reform, as it’s known to its mum) from the UK’s four biggest banks. The first point to notice is that the number of applications has ‘declined significantly’ in the last two years, particularly for businesses with a turnover of less than £1m. And if you’re wondering why, there’s a big clue in the next stat: the ratio of approvals to applications has also fallen. Apparently the banks attribute this to a decline in the quality of applications as well as tighter credit policies – but then they would say that, wouldn’t they? (although we accept that the proportion of distressed applicants will have increased lately).

According to the Bank, interest rates on loans and overdrafts have fallen in the last six months, but not by as much as the base rate – so spreads are widening, which means banks are effectively charging a bigger premium for their cash. This has been particularly marked for smaller businesses, presumably because they’re considered higher-risk – more than a quarter are now being charged a margin of at least 9% above the base rate on variable-rate loans. So it’s become a lot more expensive to borrow money, even for the lucky few who make it through the approval stage.