Finding funding may be getting easier

In this credit-obsessed era, businessmen everywhere will have noted that the
Bank of England has kept the benchmark interest rate at 0.5% and creating money
by buying £125 billion worth of assets, mostly in the shape of gilt-edged
government bonds to kick-start lending.

This quantitative easing, we are told, will ease difficulty in obtaining
credit for small and medium-sized businesses. But, research suggests that, five
months in, the initial beneficiaries are not SMEs but bigger business concerns.

Figures show that so far quantitative easing has had little effect on M4
broad-money supply holdings and lending to private non-financial companies (See
table ). If SMEs are the intended target, then credit for them seems to be
trickling rather than flowing.

Anecdotal and survey evidence indicates that banks are still stalling on
providing loans.

Alan Clarke, UK economist at BNP Paribas, says lending has improved since the
fourth quarter of 2008 but problems still persist. ‘It’s undeniable that banks
are still holding back on lending. Credit markets are only limping back to
health. Smaller enterprises, relying solely on obtaining credit through banks,
face tough months ahead.’

He believes SMEs will continue to feel the pain of credit constriction until
the fourth quarter of 2009, when money supply is projected to improve courtesy
of a ‘ripple effect’ from the upper echelons in the credit chain. However,
measuring the extent of this pain varies depending on which consultant’s opinion
is sought.

The British Bankers’ Association says proof of a recovery is in the figures.
Its data for May shows a rise in High Street banks’ lending to SMEs by £153m
(£133m in term-loans plus £20m in approved business overdrafts). This is a
marked improvement over lending positions seen last December.

A regular Federation of Small Businesses survey of 4,400 SMEs reveals that
nearly 40% of small businesses had highlighted cost of finance as a big problem
last December. However, by June the figure had narrowed to 25%.

FSB national chairman John Wright says: ‘While the fourth quarter of 2008 was
worrying, small businesses are cautiously optimistic at present and are looking
to expand.

‘Although we are certainly not out of the woods yet, many small firms are
seeing increased footfall and finding it easier to obtain crucial finance than
in the winter months, when things were at their worst so far.’

He believes providing a guesstimate for a return date to the days of easier
and flexible business finance on favourable terms would be difficult under
present circumstances.

For some, desperate times call for desperate measures. A recent Close Invoice
Finance survey of 505 SME owner managers found that a third of respondents would
take out a personal loan to fund their business while one in ten would be
prepared to use a credit card to fund business.

Additionally, 20% say they would approach family and friends in the absence
of bank funding, up from 10% last year. If this sentiment is projected
nationwide, nearly 1.4 million SMEs are still feeling the crunch.

David Thomson, CEO of Close Invoice Finance, says: ‘Conditions have forced
more and more SME owner-managers to pursue risky short-term strategies to secure
cashflow and, in the process, put themselves and those closest to them under
intense pressure.’

Furthermore, despite a 0.5% base rate, disparity exists in the commercial
rates for obtaining credit which are well above the BOE’s benchmark. It makes
talk of green shoots and a recovery sound premature for an economy that is still
largely struggling to finance its small scale business entrepreneurs.

CBI director general Richard Lambert believes a sustainable robust economic
recovery is not possible under ‘damaged’ credit conditions. In a recent speech,
he notes: ‘If you are a big company, you can raise corporate bonds or equities
and companies are doing that because those markets have opened up. But if you
are relying on bank credit, it’s still very difficult to obtain.’

If so, SME investment could be knocked again this year by a need to rebuild
balance sheets. The Bank of England says at least nine months are needed for
quantitative easing to take effect; not least because a sizable chunk of recent
asset purchases have been from foreign holders of gilts. On July 13, Deputy
Governor Charlie Bean even embarked on a seven-day charm offensive to 14 cities
across the country explaining the Old Lady’s stance.

Meanwhile, analysing business conditions is proving ever trickier for
borrowers and lenders alike. SME lending is contingent upon the applicant
business’ future plans, disclosures and projections, says one bank manager.
Survey data suggests that throughout the supply chain, businesses cut
inventories at the height of the downturn in December. Hence the recent bounce
in business activity, many believe, is based on a stock cycle fluctuation and
may not be sustained if a revival in demand is not recorded.

This sentiment is making bank managers play hard. Sadly for desperate
businesses, a return to the days of easy credit, when 125% project re-financing
packages were still available, is not likely any time soon, if at all.

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