News Column

SMEs feeling the pinch as lending to small companies falls by £3.5bn

August 29, 2014

Angela Monaghan,

The Bank of England's flagship Funding for Lending Scheme (FLS) failed to boost the fortunes of Britain's small companies in the second quarter following another fall in business lending.

Net lending by banks involved in the scheme fell by 3.5bn between April and June, bigger than the 2.7bn drop in the first quarter. Lending to small and medium-sized enterprises (SMEs) fell by 435m, compared with a 719m fall in the first quarter according to the Bank's latest figures.

Under the FLS, banks can draw 5 for every 1 of net lending to SMEs. The hope at Threadneedle Street was that it would open up finance for companies, enabling them to grow and boost the wider economy.

Chuka Umunna, Labour's shadow business secretary, said the lack of finance available for the UK's smaller companies was holding back the nation's fortunes.

"Today's figures show that despite scheme after scheme and promise after promise from ministers, profitable and successful businesses still can't get access to the finance they need to start up and grow, which is acting as a brake on our economic progress."

Of the 36 banks participating in the scheme, net lending to SMEs was either flat or down among 24 banks. The biggest fall was at Nationwide, where net lending to SMEs was down by 501m in the second quarter, followed by Clydesdale, where lending fell by 439m, and bailed-out RBS, where lending to SMEs was down 360m.

On the flipside, state-backed Lloyds Banking Group increased lending to SMEs by 384m between April and June.

John Longworth, director general of business lobby group the British Chambers of Commerce, said the LFS had failed to help many of the UK's smaller companies.

"The real test for the scheme has always been whether it is able to get credit flowing to young and fast-growing businesses. Unfortunately many of these firms remain frozen out when it comes to accessing the finance they need to fulfil their potential.

"These figures reiterate that much more needs to be done to fill major gaps in the provision of SME finance in the UK, including increasing the role of equity and bond markets and delivering a business bank with a greater capital base than under current plans and the ability to lend directly to businesses."

In November last year, Bank of England governor Mark Carney announced that the FLS would be entirely focused on business loans, with household lending including mortgages no longer eligible for the scheme. The move was seen as an attempt to take some of the heat out of the market amid rapidly rising house prices.

The scheme was originally launched in August 2012 to encourage banks and building societies to lend more to households and businesses.

The Bank said on Thursday: "Some of the weakness in bank lending to smaller businesses, which has persisted despite the fall in bank funding costs, may reflect weaker demand. The FLS extension will continue to support lending to SMEs in [the second half of] 2014."

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Source: Guardian Web

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