Business strategy 101 – Business funding update – February 2013

loansThe Bank of England’s ‘Trends in Lending’ report, published on 21st January shows business funding options remain hard to come by for SMEs.

The underlying message from the end of 2012 and the beginning of 2013 is that Finance for the SME sector remains elusive and, as a consequence, demand is subdued.  Let’s take a closer look at the details:

1.Executive summary

The annual rate of growth in lending to UK businesses was negative in the three months to November.  Lending to small and medium-sized enterprises and large businesses also contracted over this period.

According to the Bank of England’s 2012 Q4 Credit Conditions Survey, spreads over reference rates on new lending fell significantly for medium-sized and large businesses and were broadly unchanged for small businesses.

  • Business lending fell by £2.8bn in November 2012.
  • Net lending to small business contracted by £6.4bn over the past year.

a. Availability of funds

According to the Trends in Lending report, lending to small and medium-sized enterprises contracted over the three months to the end of November 2012.

‘Net lending — defined as gross lending less repayments — to SMEs by all UK-resident banks and building societies remained negative in 2012 Q3’.

Lending to UK businesses (averages)

2007 2008 2009 2010 2011 2012 Q2 2012 Q3
 Net monthly flow(£bns)  7.4  3.8  -3.9  -2.1  -0.8  -0.4  -1.2
 3-month annualised growth rate (%)  20.8  10.7  -7.7  -5.2  -2.0  -3.0  -2.2
 12-month growth rate (%)  16.8  17.9  -1.8  -7.1  -3.3  -3.1  -2.8
Lending by UK monetary financial institutions to private non-financial corporations (PNFCs). Data cover lending in both sterling and foreign currency, expressed in sterling terms. Seasonally adjusted.

b. Corporate distress

The survey goes on to suggest that levels of corporate distress are looking reasonably stable.  As discussed in previous articles, the Zombie company is operating in a relatively benign environment with low interest rates, banks unwilling to crystallise ‘difficult situations’ and a much more understanding HMRC.

c. Demand

Contacts of the Bank’s network of Agents reported that, overall, demand for credit remained muted.  In recent discussions, some major UK lenders reported that a lack of confidence among firms was still weighing down on demand for credit.

Demand for credit was expected to increase slightly for small and medium-sized firms and remain broadly unchanged for large firms in 2013 Q1, according to respondents to the Credit Conditions Survey.

d. Credit conditions for businesses

The overall availability of credit to the corporate sector increased significantly in 2012 Q4, according to respondents to the Credit Conditions Survey.  This was reflected in a significant increase in availability for medium-sized firms, an increase in availability for large firms, and a slight increase for small firms. See the chart 3.1 on page 13 of the report for the details.

Looking forward, lenders in the Credit Conditions Survey expected credit availability for firms of all sizes to increase in the coming quarter.

Comment: This factual evidence from the Bank of England of a continuing lack of funding for the SME is supported by the more anecdotal evidence we hear every day in the workplace and in the press.  The bottom line is that it is still proving difficult for the banks to provide funding for the SME.

These continuing ‘poor lending decisions’ have been formally admitted to by Lord Green, the former chairman of HSBC and now the Government’s trade minister, when he told a House of Lords Committee that the rise of so called “casino” investment banking has seen lenders “deskill” their commercial banking businesses, which has led to “extraordinary” lending decisions about small companies being made. Bank bosses “know it’s a problem”, he added.

It is not surprising that lending remains difficult when you consider that the UK regulators have given Royal Bank of Scotland and Lloyds Banking Group until March to begin dealing with a black hole in their finances.  Brooks Newmark, a Tory member of the Treasury Select Committee, suggested this deficit could be as large as £30bn!

The following comment on the Trends in Lending report was made by John Longworth, Director General of the British Chambers of Commerce (BCC):

“The figures paint a challenging picture for UK firms, as business lending continues to weaken. These numbers reflect the uncertainty of the UK economic outlook and the difficulties in the financial sector, as banks continue the process of deleveraging. The report also confirms that some of our youngest and fastest growing businesses are still struggling to secure the credit they need to grow, stymieing growth across the country. Also, businesses that have weathered the recession and are now looking to fund growth and exports are having the same difficulties’’.

Funding for Lending scheme update

Lenders in the Trends in Lending survey reviewed above commented that the Funding for Lending Scheme had been important in increasing credit availability to the corporate sector.  The intimation being that it had little effect on the SME sector!

It has been claimed by Andrew Bailey, head of prudential regulation at the Financial Services Authority, in a recent meeting with MPs, that interest rates for borrowers had not come down “to the same extent” as those paid on deposits.

In addition, the Business Minister Michael Fallon recently told a House of Lords Committee that there is “not enough evidence yet” that the flagship scheme to cut the cost of loans is helping credit-starved small companies.  Mr Fallon said he is continuing to put pressure on banks to make sure that Government lending schemes, including FLS and the Enterprise Finance Guarantee, are properly used.

Mr Fallon said the project is designed to “get to the bottom of” where loans go.

“Without beating up the banks, it’s important we increase the transparency as to where lending is actually going,” he said.

“We’re looking very hard with the Treasury at what information can be made available.”

He said that he gets “30 to 40” letters a week from other MPs complaining about constituents who say they have been unfairly turned down by banks, and added that “the perception it’s not even worth approaching your bank” could be dampening demand.

Comment:  In my opinion the “the jury is still very much out” on whether the Funding for Lending Scheme  was delivering what it was set up for, i.e. to increase funding availability for all business,  or if it is simply helping the big Corporates and the availability of secured domestic lending to the consumer?  Time will tell.

Alternative finance update

It is still very surprising to me that the Invoice Finance and Alternative finance industries generally have not taken up more of the slack in filling the void left by the banks in funding the SME market place.

An article in the Telegraph wrote about a much older industry that has also been quietly exploiting demand from credit-starved small businesses.

The article quoted Barry Stevenson, the chief executive of pawnbroker Albemarle & Bond, who says speed and convenience are the key reasons he is seeing starting to see more business customers.

“They don’t want to waste time with banks for emergency cash flow. They know they can get funds when they need them. It’s very fast and its value for money.”  The industry has a certain “historical” image, Mr Stevenson admits. However, he argues that associations with Victorian usury are being slowly replaced among businesses with a view of pawnbroking as simply another form of asset-based lending.

The company’s business customers are often sole traders looking for cash in an emergency — whether to buy stock or pay a tax bill.

Comment:  Part of the reason for the lack of growth in invoice finance in these straitened times might just be the issues mentioned above by Mr Stevenson i.e. the continued perception that these types of finance lack transparency and are expensive.  Interestingly, and in an effort to address these public perceptions, a meeting of finance firms, business groups and brokers was held on 18th January.  It is thought that the Asset Based Finance Association, who also attended the meeting, will very soon be launching a self-imposed Code of Conduct to address these issues that will possibly include independent scrutiny and audited operating standards for the industry.

I would be very interested to hear comments on this article and/or any of your recent experiences in business funding, good or bad.

As always I can be contacted at, or on 0845 689 8750.


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