In November last year Mark Carney stopped the funds from being used to supply residential loans and allowed participants in the scheme to to draw £5 from the pot for every £1 of net lending to SMEs.
But quarter one FLS figures showed net lending contracted by £2.7bn which included a £0.7bn decline in net lending to small businesses.
In this week’s Marketwatch we asked our panel of experts what effect the banks and buildings societies’ reluctance to lend to SMEs will have on the economy and how this affects mortgage brokers looking to set up or expand.
Gemma Harle, managing director of TenetLime, says brokers often avoid going to banks for loans due to lack of understanding of their business models
Rob Collins – head of commercial lending, Brightstar Financial, says banks must stop ostracising new businesses and those with previous credit problems because they can help boost the economy
Robert Wood, UK economist at Berenberg Bank, says weak lending flows should not be cause of panic, yet
Gemma Harle, managing director at TenetLime
It can be relatively difficult for mortgage brokers to access business loans for a number of reasons.
Firstly banks don’t necessarily understand their model which can additionally be hard to place a tangible value on. Consequently they often require personal guarantees which brokers may not find viable or desirable.
Firms can also struggle with the unfamiliar territory of producing a good business plan that clearly defines their strategy and objectives and for smaller amounts, little support may be available.
From a TenetLime perspective we often see brokers taking the personal funding route first and foremost through loans from family or using credit cards. If this does not deliver, then Tenet is more often their second port of call, with banks not even approached in many cases.
We offer business loans for a number of scenarios including to support acquisition, lead generation or bringing on new advisers. The benefit here is that we understand firms’ business models and as an appointed representative of TenetLime we already have the majority of information we require certainly on the financial side. Our ethos is that is if they grow, we grow.
The ability to bring new advisers into the industry in particular is essential to its future health and the most efficient way to do this is to recruit advisers into established firms.
Banks could certainly help SMEs in this area by offering more education and support around business loans which would all help towards restoring confidence in the banking sector. A personal point of contact is always a positive and a little hand holding can go a long way!
Rob Collins – head of commercial lending, Brightstar Financial
The Bank’s report latches on to the quarterly contraction in banks accessing the FLS scheme for commercial lending.
However, the very fact that the FLS scheme contracted, even with the brake put on accessing funds for residential lending, makes it very clear that the major banks are still a long way from regaining the confidence and appetite they once had for this type of lending.
Although the SME sector was badly hit with the lack of funding through the credit crunch over the last year mainstream institutions have returned with a much better appetite for SME lending as opposed to property investment business.
However, this improved appetite comes off a very low start point and new businesses, those in specialist areas or companies and directors, seeking funding with an adverse credit background are still not being considered by lenders with any enthusiasm.
So many new businesses, particularly those less than two years old, and others with legacy issues caused by the recessionary pressures of the past four years are in need of finance. Yet as an industry even though money is available a Catch 22 scenario exists in that funding is still being withheld which would, in most cases, improve trading prospects and by extension the country’s economic recovery.
The growing need for SME funding can be seen in the number of new lenders, often short term and unsecured, entering the market. But without a major change of focus from the major banks that demand remains largely unfulfilled regardless of government intervention.
Robert Wood, UK economist at Berenberg Bank
Cash-rich firms and consumers with new found confidence have propelled the economic rebound.
The recovery shows every sign of continuing despite weak lending flows. Borrowing greases the economy’s wheels but it is not the be-all and end-all of economic growth.
Growth that is dependent on ever-rising debt relative to income cannot be sustainable as the past five years show. Weak borrowing flows are not a cause for panic yet.
Some of the bad headlines on credit flows disguise an improving picture. Aggressive deleveraging by real estate firms has dragged down total lending. Ignore that and the picture is of gradual improvement.
Firms have other sources of finance too. Equity can be important. That being said voracious innovative small firms need credit to be available when it is needed. That is still a problem. Savage credit tightening by banks helped cause the recession.
But banks’ priorities are changing. Lenders have improved corporate credit availability for six consecutive quarters now. There is much further to go, although we should hope that the UK never gets back to the free lending practices around prior to the crisis.
The fledgling business bank along with the cathartic process of economic recovery should provide the basis for small firms’ credit access to improve further.
The Bank of England’s Funding for Lending Scheme was never going to solve the problems: that was an insurance for banks against bad times returning rather than a reason to lend more.
Now economic conditions are on the up banks do not need that insurance.
