The real reason small businesses aren’t borrowing more from their banks
15 November 2012 12:20am
ALMOST every politician I meet asks me one question. Often with a hint of menace, they demand: “why are banks refusing to lend to small businesses?” They say their postbags are full of complaints from small to medium-sized enterprises (SMEs) that banks are refusing to approve or renew loans or overdrafts. In reply, banks point out that they make money by lending, and insist it is a demand issue – that fewer SMEs are coming to borrow
But this drives politicians to fury: if SMEs didn’t want to borrow, they wouldn’t be complaining about the banks. From enterprise guarantees to the Funding for Lending scheme, making banks lend to businesses is a priority for the government. So what is really going on?
Whichever way you look at the issue, there has indisputably been a decline in demand for finance among SMEs. Over the past year, the number wanting loans or overdrafts has dropped by about a fifth. The trend is similar in the number of SMEs that actually apply for these products. Approval rates have stayed roughly stable, but fewer applications inevitably means lower lending.
But why do fewer SMEs want to borrow? Surveys suggest one main reason: lack of confidence in the economy (followed distantly by lack of confidence that they would get the loan). Like big companies and households, when small businesses are worried about the future, they don’t take out new loans. They pay off old ones and build up savings. The entire SME sector has become a massive net depositor, with its surplus over borrowing rising from £8bn to £21bn over the past year – a massive cash stockpile.
But that doesn’t explain complaints from SMEs. It also doesn’t explain why the 40 per cent of SMEs who exercise their right to appeal, after being turned down, get the decision reversed.
One reason is that, before the crisis, a less risky economy encouraged a lot of lending to small businesses. SMEs were sometimes given overdraft facilities almost as big as their entire annual turnover, when best practice says that it should be no more than 10 per cent. Banks are also under immense pressure from regulators to reduce high-risk lending, and many SMEs are finding the adjustment understandably difficult. Too often banks failed to sensitively communicate the new situation to their customers, took away experienced relationship managers, and used blunt decision-making processes. This is something they now recognise, and are working hard to change.
But is the lack of lending to SMEs undermining the economy? Over the past year, just 1.5 per cent of all SMEs had a loan rejected. Whatever problems the other 98.5 per cent had, it wasn’t caused by a lack of lending.
If an SME wants finance, it should apply. It might get the answer it wants.
Anthony Browne is chief executive of the British Bankers’ Association.
In other news
Greece’s interior minister has said that the country cannot afford its 5 June payment to the International Monetary [Read more]
Young people aged 16 and 17 years old should be given the chance to vote in a EU referendum, according to the [Read more]
The Bank of England is carrying out a confidential investigation into what would happen if the UK left the European [Read more]
This year's Eurovision Song Contest will feature an addition to the normal line up – for the first time ever, [Read more]
Tonight is the 60th Eurovision Song Contest, and once again we're in for an evening of cheesy music and crazy [Read more]
The Eurovision Song Contest is getting more and more expensive, despite Europe's decline into austerity. [Read more]
There were delays of up to 30 minutes to trains in and out of Kings Cross Station, after the station was re-opened [Read more]
When a 20-year-old footballer publicly declares he wants to leave a club and his agent hurls insults at one of [Read more]
The outbreak of bird flu in the US is leading to an unprecedented situation for companies reliant on eggs – [Read more]
Germany's finance ministry has denied reports it was considering offering Greece its own parallel currency. [Read more]
Chancellor George Osborne was given a boost today, as higher tax receipts helped shrink the deficit by more than [Read more]
Beleaguered spread-betting firm Plus500 today suspended trading in its shares on London's junior market, following [Read more]
The news that card and electronic transactions have overtaken cash as the UK’s preferred method of payment is [Read more]
Despite the crippling effect of election uncertainty, offers received in April were up 15 per cent on last year [Read more]
Former secretary of state for communities and local government Eric Pickles is to be knighted, 10 Downing Street [Read more]
Network Rail engineers have destroyed the Abbey Wood station as part of the Crossrail development that is expected [Read more]
The Championship looks set to once again be named the fourth most-watched league in Europe, following a seven [Read more]