WHY are banks refusing to lend to small businesses?” is a question I am asked almost daily. Indeed, it was the first question put to me in a TV interview yesterday, when I was welcoming the expansion of the government’s Funding for Lending Scheme. The scheme has driven down small business borrowing costs to about the lowest in history, and banks generally have plenty of capital to lend. The heads of business lending in the banks do want to lend – it is how they make money – and the banks have a vested interest in having a thriving small business sector.
And yet despite this, net lending is down, and business groups complain about lack of access to bank finance. So how do you explain this conundrum? A fascinating study by the new Enterprise Research Centre – supported by UK banks and the government – sheds light on what is happening. The paper What Do We Know About The Relationship Between Entrepreneurial Finance and Growth? highlights that there are issues with both supply and demand.
As I have written before, demand from small businesses for loans, overdrafts and other finance is down since before the start of the financial crisis. Overdraft applications fell by a third between 2001 and 2009, and have fallen further since. Applications for leasing and hire purchase agreements have fallen by 60 per cent between 2001 and 2012. Much of this reflects lack of confidence by small businesses in the economy. Small firms are doing what households do in times of uncertainty – paying off debts (which reduces net lending) and saving more. Small firms are now massive net depositors – with over £125bn in savings accounts, up 6 per cent in a year.
But the academics also find that rejection rates from banks have increased since before the crisis; that the sorts of companies particularly affected are high-risk firms and that banks are asking for more collateral. The reasons are that the high risk lending practices from before the crisis have come to an end. Lending trends since the crisis are caused by “increased risk aversion, increased uncertainty, and higher bank funding costs.” Equally the paper points to the need for greater awareness and use in business of alternative finance forms, such as equity and asset finance.
It is true that banks – who have been blamed for risky lending before the crisis – are cutting their risks and being more prudent. One part of that is posting more capital – banks are required to put aside as much as five times more collateral to lend to small businesses as they do when lending a mortgage. It is all part of making sure the crisis doesn’t happen again.
But most businesses do get the finance they need, approval rates for loans remain high at 80 per cent to 90 per cent, and banks are keen to lend. The widening of the Funding for Lending Scheme, which we advocated, is welcome. If you are a small business with a good business plan who wants funding, our message is: don’t be discouraged. Apply to banks for a loan. They are in the business of lending. And with interest rates at record lows, there has never been a better time to borrow.
Anthony Browne is chief executive of the British Bankers’ Association.