Lending to business, especially small business, has become one of the most
controversial issues running through from the credit crunch, the recession and
into the current recovery. Many measures were in place to help small business
but complaints about lending have continued.
The Labour government, at the beginning of this year, said it would force up
lending. During his emergency Budget George Osborne said the government was
working with the banks on lending – but made few commitments.
Figures released by the Bank of England this month showed that lending to
business had fallen back for the fifth successive month. Indeed, July saw the
stock of lending to business shrink by £2.5bn.
The bank said that “while credit conditions were easing for larger
businesses, they remained tight for smaller firms”.
The bank also reported that demand for credit remained “subdued”. This is
likely to be because many businesses are focused on their current debts rather
than looking for new ones. However, the fall in lending is not as bad as that
witnessed January when lending fell by £6.6bn. February was almost flat but
lending began falling by large sums again from March.
In addition, the Bank reports that effective interest rates are at some of
their lowest levels since August 2007. Back then, the effective rates rose to
7.64% while Libor, the London Interbank Offered Rate, stood at 6.58% in
September the same year.
So tension is stretched across three issues: businesses are focused on debt
and cash management rather than borrowing to invest, there is evidence of a lack
of lending by the banks; and there are concerns that the cost of lending could
rise in the near future.
Persuading the banks to loosen the pursestrings will require SMEs to present
more up-to-date accounts and forecasts than those currently held within
Companies House – where the most recent data will be figures filed for the
accounting period during the midst of the recession. Accountants for SMEs are
charged with educating their clients.
Another financing option for SMEs could be to approach other members of the
supply chain to ask for help. Accountants have suggested anecdotally that
finance is being made available within a chain to help maintain workflow.
The demise of local bank managers – the so called “Captain Mainwarings” – who
used to wield power over lending decisions has been bemoaned. However, a
renaissance is not on the cards. Their lack of prowess in decision-making led to
their demise, stated Lloyds Banking Group chairman Sir Win Bischoff last week.
Lobby groups including the Forum of Private Business warn that unless the
flow of finance improves, businesses will close and the private sector will be
unable to launch the economic recovery through growth and job creation.
The lull in lending
by Dan Roberts of Barclays Corporate
Contrary to popular belief, banks are working very hard to make sure there is
sufficient funding in the market for those companies which present a viable
Indeed, Barclays has just announced we provided £18bn in new lending to
businesses and households in the first half of 2010.
Businesses have also been borrowing less for some time as the whole economy
has deleveraged, but we expect new loan demand to increase towards the end of
2010 and into next year with demand set to jump in 2012. Management teams cannot
afford to ignore the situation.
Many UK and European companies will need to refinance in 2012 as a result of
three, five and seven-year agreements signed in 2009, 2007 and 2005 reaching
maturity. According to our estimates, the value of debt will be double the
amount due to be refinanced this year.
In addition to this, as the UK economy begins to rebalance between public and
private sector and confidence in the private sector increases, businesses will
start to borrow again for capital investments, which will increase the pressure.
This will lead to a spike in demand and increase the cost of debt to businesses.
Those businesses with the ability to refinance early with their lenders
should seriously consider doing so to avoid the squeeze and to secure the best
possible rates before the supply of finance available from bank deposits and
from the capital markets becomes increasingly scarce.
Adding additional pressure to this spike will be demand for growth finance.
Businesses are currently managing for cash, but capital expenditure cannot be
deferred indefinitely and, at some point, they will have to invest again. Smart
management teams will spot opportunities created by the recession and it is
these businesses which will be the first to seek finance. Demand will accelerate
as the economy strengthens and this may well coincide with the refinancing spike
as it reaches a crescendo in 2012.
This additional growth funding demand will increase the upward pressure on
the already apparent 2012 refinancing spike, reducing available supply even
further and thus increasing the cost.
And the increase in demand for liquidity is not just a feature of the lending
market. Sovereigns, banks and corporates – anyone raising finance – will find
themselves exposed to the same liquidity constraints.
Banks raise money to lend from customer deposits and through the wholesale
markets. There is increasing competition to attract customer deposits, and
increasing competition in the wholesale markets for liquidity.All of this means
that the time for UK businesses to refinance is now while banks and the capital
markets supply outstrips the presently low demand.
However, it is clear many chief financial officers are delaying refinancing
in the belief that spreads will fall before their debt matures. This belief has
emerged as a result of the widening of spreads over base rate and Libor (London
interbank offered rate) from their pre-crunch levels, leaving many businesses
with the impression that lending is expensive in historical terms.
The reality is that, while margins have increased due to a rise in lending
risks and regulatory change such as banking capital requirements and the
increased cost of wholesale borrowing, bank debt is still substantially cheaper,
in absolute terms, than in 2007 or 2008 due to the historically low
This is unlikely to remain the case. Refinancing early will avoid the
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