Private sector loans support solid SMEs

In a speech on Wednesday, prominent backbench Conservative MP David Davis said that Britain must do more to help small and medium size businesses through the recession, but stressed that this did not mean forcing the banks to lend. Instead he argued that businesses themselves would be the source of the recovery.

The government has been heavily criticised by some for not making more credit available to businesses. The chancellor has said the government “would not tolerate banks piling the pressure” onto small firms, and that it was their “obligation” to lift lending.

Angela Knight of the British Bankers’ Association argues that this is not the banks’ fault: “You can’t make a business proposition that is not working in the recession work by giving it money” and that there are fewer viable applications being submitted.

But what does this mean for start-ups, small firms and entrepreneurs? Are credit-worthy businesses being starved of credit, and if so, why is nobody seizing the opportunity?

It turns out that Davis is right about trusting the private sector: entrepreneurs are stepping into the breach. Even as the government prepares to cut funding to the Business Link advisory service later this year, enterprising companies have set up banks and are offering their services to small businesses with sound business models.

Two good recent examples of this are the British Enterprise Bank (BEB) and Trafalgar Capital Advisors. Last week, plans for the BEB were launched by a team of senior bankers and hedge fund managers. They have set themselves the task of raising £100m to lend to small businesses. They are in the final stages of obtaining a banking license and hope to open their doors early next year.

Trafalgar Capital Advisors have been offering finance to small, listed companies that are struggling to borrow from banks and are too small to access bond markets. Trafalgar provides businesses with finance in the critical $1-5m range which is too small for most brokers and other funds. Its relationship-led approach also offers an advice service.

While the pundits bicker, entrepreneurs have noticed a gap in the market and set to work. Those considering starting a business should bear in mind that a sound proposition and a good business plan are still the key to unlocking lending.