Don’t blame the banks

It’s too easy to blame the banks for all of our woes, writes Jason Hesse.

It happens every quarter. As the Bank of England releases lending figures, we receive a slew of comment from business owners and media pundits about how terrible it all is. “More proof that the UK’s businesses simply aren’t getting the funding they require,” says one.

“SMEs are paying a high penalty for bankers’ errors,” says another. ”For the economy to start growing in earnest, SMEs need to grow. And to grow, they need funds. Currently, those funds simply aren’t there.”

A third: “The engine of the economy needs fuel but it’s simply not getting it.”

The data do not make for happy reading. The April 2012 Bank of England Trends in Lending report shows that the volume of lending to UK businesses fell in the three months to February, with the stock of lending to small and medium-sized enterprises contracting the most.

The net monthly flow of lending in February was at its lowest in almost two years. The stock of lending to businesses decreased by around £9 billion in the three months to February.

Yet, all is not as it seems. Credit availability was broadly unchanged for businesses in the first quarter, according to respondents to the Bank of England’s 2012 Q1 Credit Conditions Survey. And another survey of businesses, conducted by the Bank of England’s network of agents indicates that for most businesses, shows that credit availability hasn’t really changed since last summer.

Indeed, the main problem isn’t that there is less money to go around, but that SMEs simply aren’t trying to access bank funding. Most major UK lenders have showed that demand from SMEs “remained muted” during the last quarter.

Take a look at the graph, below. While it’s clear that there was a decrease in availability of credit for small businesses (the dark blue bar on the left-hand side), demand for credit was much, much lower (dark blue bar in the bottom right quadrant).

Next quarter, the exact opposite is expected: while availability is expected to rise slightly, demand will increase significantly. It will be interesting to see how lenders react to the stronger demand.

Charles Delingpole, co-founder of MarketInvoice, says the muted demand is a result of the products that are on the market. SMEs are turning to alternative sources:

“The kind of financial products being offered to SMEs are unsuitable to their needs, given that they impose extensive financial costs comprised of both price – that is, high rates – and non-price factors, such as over-collateralisation in the form of debentures and personal guarantees. You can already see the forced migration of SMEs away from overdrafts on to invoice finance facilities, which SMEs just do not like.”

Data from the BDRC SME Finance Monitor supports this. While the main forms of finance remain overdrafts, credit cards and bank loans, an increasing number of firms are turning to alternative types, including leasing or invoice finance.

The blame for the dire straits small businesses supposedly find themselves in is placed entirely on the Government and the banks. There is talk of the economy being “strangled” by evil high-street banks, while the Government is being blamed for not having launched any successful initiatives to materially improve credit conditions for SMEs.

There is, to an extent, some truth in the latter point. The Government is notoriously hopeless at helping small businesses. Take the Enterprise Finance Guarantee Scheme, once the Government’s flagship small business lending programme, which offers to guarantee 75 per cent of the value of lending in an individual loan to a business.

In the last quarter of 2011, the value of loans offered under the EFG scheme dropped to £77.8 million, down 24 per cent from £102.8 million during the same period last year. By no account can an £78 million per quarter programme be considered successful; it’s a drop in the ocean.

Besides, the sheer amount of red tape a business owner has to navigate through before receiving a penny doesn’t make it worth his time. (And don’t even get me started on Project Merlin.)

Lending to small businesses is not easy. While half of the business population is screaming bloody murder about the depressed lending figures, the other half is quietly making do, either actually applying for loans and being given capital or, when this isn’t possible, finding alternative sources.

But let’s stop the facile finger-pointing. The best entrepreneurs will always cobble together the cash to fund their next big thing, regardless of market conditions. And now, more than ever, there are scores of alternative financing sources springing up all over the place. If there’s a will, there’s a way.