Alium’s Financial Services Director, John Bloor, dismisses the recent calls for a “Business Bank” to support lending – seeing strong, structured businesses as the only real way of truly increasing investment.
The latest figures on lending to businesses released by the Bank of England have renewed calls for a new Business Bank to be established. Lending overall to business declined in the second quarter and whilst lending by banks participating in the Funding for Lending Scheme increased, the amount – a modest £1.6bn – was regarded as a further indicator that the scheme was still not really working. A widely held view is that our slow economic recovery can be attributed in no small measure to banks’ apparent reluctance to lend to businesses, particularly SMEs. But is this really true? I’m sure that owners of businesses that have had loan applications turned down will think it is, as will those who choose not to ask because they assume the answer will be no. Equally, those businesses that have increased their bank borrowings probably won’t.
Do UK Businesses Need a Business Bank?
The Funding for Lending Scheme was designed to make it easier for banks to lend because it reduced their funding costs (which could then be passed on to borrowers). It was not about encouraging them to lend in circumstances where their credit appraisal processes would otherwise have said no. There is a government sponsored scheme that’s long been available to SMEs – the Enterprise Finance Guarantee (and its forerunner the Small Firms Loan Guarantee Scheme) – that provides security to lenders and can turn ‘unbankable’ borrowing requests into ‘bankable’ ones but the underlying borrowing proposal still has to be a sound one. And the default experience, particularly under the original SFLGS, would suggest interestingly enough, that a great number of them weren’t.
The high street banks have said and continue to say that there is no reluctance amongst them to lend money to business and I’m inclined to believe them. In the run up to 2008 they were guilty of lending recklessly in many areas (though not I suspect to SMEs) and as a consequence I would argue that the lending climate then was wrong but not now. Demand for borrowing from business is well within the capacity of banks to lend but larger businesses have cash, are not investing to the extent that requires them to borrow and if they do need additional funding they do have wider access to equity and debt capital than SMEs. Amongst SMEs there probably is a belief in many of them that banks won’t lend to them so they don’t ask. And there will be some who make their own mind up that they could not be certain that their business would be able to repay a loan if they asked for one so don’t. And if the ones that do ask are turned down, it’s not because the bank manager is having a bad day or has been told he’s got no money to lend, it’s much more likely that the borrowing proposal did not make enough sense. I don’t see a Business Bank lending against unsound borrowing proposals any more than a high street bank today would.
The ingredients that make a borrowing proposal make sense include management – their experience, competence and integrity – and how well the request has been thought through and is articulated. If this favours better management, then that’s how it should be. So let’s stop always bashing the banks and stop to consider instead if there might be another reason.
What do you think the solution to the lending crisis is for businesses? What more can bank or government do? Do you think UK businesses need a business bank? Share your thoughts with us below.
