Lending levels to small firms still not rising and banks blame tough winter weather

FPB tells Growing Business that businesses remain “alienated” by the big banks

Uncertainty over government spending cuts and poor winter weather has led to a drop in demand for bank credit from small businesses in the first quarter of 2011.

According to a new survey from the Bank of England, the default rates on loans for small businesses also rose over the three-month period.

A number of lenders who responded to the survey claimed the rate rise was prompted by deteriorating assessment of borrowers’ creditworthiness, and the deteriorating state of the overall economy.

The, lenders’ margins on small company loans rose during the first quarter, and a further increase is expected in the coming months.

However, respondents reported that the access to credit by new and growing firms changed little over the first quarter, and said they expect more credit to become available over the three-month period to June.

In response to the Bank of England figures, Phil McCabe, of the Forum of Private Business, told Growing Business:

“Falling demand does not reflect a lack of need for commercial finance but instead that small businesses, increasingly alienated by major banks because of their steep lending costs, are beginning to turn to alternatives such as Funding Circle and Funding Store.

“In addition, unexpected inflationary pressures and other economic factors are leading many small firms to focus on consolidation rather than growth, which of course impacts upon their borrowing.

Meanwhile John Walker, national chairman of the Federation of Small Businesses, told us that small firms “need to have their faith restored in banks and until this happens we will not see small firms approaching the banks for credit,” and quoted a recent ‘Voice of Small Business Survey,’ which found that 84% of the body’s members have not approached the banks for credit in the last two months.

The British Bankers’ Association (BBA) was quick to defend the banks in response to the new figures.

BBA spokesperson Brian Capon told us that banks are still lending around £500m of new money to small firms every month, “but repayments on existing borrowing tend to mask this out in the net figures.”

Capon added: “Banks want to lend to small businesses but it’s important that the business can generate sufficient income to meet its new and existing financial commitments.  It’s also important that businesses have a proper proposal to back up any application to borrow money including a clear ‘plan B’ in case the original business plan doesn’t work out.”


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