FSB – Small businesses are denied credit

18th June 2012

There is still a substantial body of opinion that believes the corporate sector doesn't want to borrow. As this piece points out; "financial and survey evidence suggests that, at the moment, lack of credit is not the main barrier to growth for most firms. In fact, the business sector in the UK has been running a financial surplus, now sitting on top of a £754bn corporate cash pile that it doesn't want to invest.

In aggregate, it is not lack of finance that is holding firms back from investing, but uncertainty about whether it makes sense to invest – if nobody wants to buy the widgets then why invest in producing them?"

The banks have seized on this to claim that part of the reason they are failing to meet lending targets is that businesses don't want to borrow. For example, here is the response of one bank executive to George Osborne's recent banking initiative: "It's not clear that these measures to boost the supply of credit are going to make much difference. Confidence is poor and businesses don't want to borrow money to expand."

However, this picture is thrown into doubt by recent research from the Federation of Small Businesses: "More than four in 10 (41%) small firms were refused finance from high street banks as confidence dipped in the second quarter. With the economy in recession, the FSB's Small Business Index measured 1.3, down 0.9 points from 2.2 in Q1 as firms continued to feel pressure from rising overheads.

Not only have many been refused credit, a significant minority suggest that it is preventing their businesses from growing: "With one in five firms saying access to finance is the main barrier to achieving growth aspirations, the FSB believes the credit squeeze will impair small businesses' growth plans, reduce new job creation and further set back the UK's struggle to emerge from recession.

However, the research ended on a more positive note, saying that in spite of the credit squeeze, 50% of respondents still planned to grow their business over the next 12 months, but only 7.2% said they planned to grow, rapidly, a decline from Q2.

This was the FT's interpretation of the story. It also points out that the most vulnerable sectors were the property market and financial services, which are critical to London's fortunes. 

Mindful Money has previously discussed whether Chancellor Osborne's new scheme is likely to get business moving here. However, if businesses do want to borrow, this suggests that the plan may have more chance of success.

It also suggests that it is the banks where the pressure needs to be applied. Responding to the FT article, Chris Poll suggests in the comment boards it is not merely a question that banks are trying to hoard cash, but they lack the internal system to manage risk effectively. He also suggests that SMEs need to look at their own systems to ensure they are providing the banks with relevant data:

"SMEs themselves (need to) produce and then regularly supply up-to-date quality assessed reliable management accounts information in the bespoke format required by the bank and banks (need to) update their legacy infrastructure to use latest web based technology to process this information cost-efficiently and time-effectively on a regular basis so risk is more accurately assessed, priced and regularly monitored." 

The relative popularity of previous government schemes also suggests that banks may be being disingenuous in saying businesses don't want to borrow. This piece on the £20bn National Loan Guarantee Scheme shows that take-up has been relatively strong and businesses are deriving benefit, even if it is not being seen in stronger growth in the wider economy.

Banks are in a tricky position. They have to meet European-directed solvency targets at the same time as supporting increased lending to riskier enterprises. However, claims that they are not lending because there is a lack of demand from smaller businesses are starting to look, at best, inaccurate and, at worst, misleading.


More on Mindful Money:

The financial crisis and the benefit of hindsight

Osborne’s £140 billion plan to jump-start UK economy

Whose fault is today's bad economy?

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