As bank lending to SMEs continues to fall, it’s time for the government to take action

It’s not just the weather that’s bad this summer; the economy’s not looking too sunny either.

Bank lending to businesses continues on its downward track with the reduction in lending in June being faster than the average of the previous six months. Small businesses are particularly suffering; according to the Bank of England, lending to small businesses fell 4.2% in May compared to the previous year.

Businesses are blaming the banks for not lending and it’s certainly true that it’s harder to get a loan now than it has been for decades. Some 28% of loan applications by small businesses are currently being rejected compared to around 4% before the Crunch.

It also seems that many SMEs who could do with extra funding are deciding not to apply through fear of rejection and fear that it may adversely affect their existing overdraft terms. They are holding back on growth plans and, given that the entire economy depends on SME growth, this is a very worrying trend.

Where banks do lend, they are charging SMEs far more in interest rates than larger firms: in many cases over 5% – that’s 10 times the base rate!

I suspect the banks fear another recession and are paranoid about filling up their asset books with more dodgy loans. Certainly, the economy as a whole looks shaky, with the prospect of several countries defaulting in the Euro zone to now even the risk of a US default. Clearly, capital is flowing out of the West and into China, and even they have some economic hurdles to jump.

So where does this leave us? The business secretary, Vince Cable, is calling for another round of Quantitative Easing to boost demand but I suspect the problem is deeper than that and QE could so easily lead to further inflation and the need to increase interest rates. Growth can only come from real growth in the SME sector. That requires investment, which relies on growth finance, and the banks are reluctant to provide that. Demand in Asia is high and, unless suitable firms have the means to exploit those markets, we will fall further behind.

It’s about time the government took decisive action. Public sector cuts are only part of the solution; there is also the need to facilitate the flow of growth finance into the economy. I am not talking of going back to the pre-Crunch lending boom – that was unsustainable – but the choking off of good firms who could grow with the right support must stop. In years to come, we will look back at this period with amazement at how we squandered the opportunity of using the mainly-nationalised banks as a source of lending to SMEs with good prospects. If these banks could be made to increase their lending, then it’s likely that other banks will soon follow.

Gary Cousins
Business solicitor