21 Apr 2011

Small businesses still suffering ongoing credit squeeze

The smattering of better economic news, on the 2010 deficit, and retail sales growing marginally, is to me  fairly comprehensively outweighed by the contents of a fairly obscure Bank of England report.

Trends in Lending is well worth a read for anyone suggesting stellar times for British jobs and the economy.

Small businesses are the bedrock of job creation for the economy. We all know the stats: 60 per cent of all private sector jobs come from SMEs. Small firms are responsible for half of UK turnover etc.

This is the Bank’s biannual detailed report into credit flows to businesses and small and medium enterprises in particular, and the results are not pretty at all.

Top Facts:

Stock of lending to businesses shrank by around £5 billion in the three months to February

The cost of lending for new borrowing (Spreads over reference rates) narrowed for larger businesses, but increased for small businesses in Q1

SMEs reported banks seeking to replace overdraft facilities with alternative, more expensive, credit products.

This is the very opposite of the picture you would want going into recovery.  When seen together with comments from the Bank’s Monetary Policy Committee minutes yesterday that exporters were not investing sufficiently to take advantage of the cheap pound, and you have a concerning brake on growth.

The Federation of small Businesses  told me today that one of the problems was that only 16 per cent of small businesses were actually applying for credit, and half of those were getting turned down.

In any market, including credit, rationing can occur by withdrawal of supply, or by high pricing. The fact that it is coming through the latter will be of little comfort to the small businesses that are the backbone of Britain’s economy.

I have been told by one of Britain’s leading bankers that it is small and medium enterprises that were always going to face the squeeze from extra bank regulations. It is difficult for banks to squeeze mortgage customers and larger customers, so small business customers are bearing the brunt.

This runs almost entirely contrary to the thrust of the much-hyped Project Merlin  deal. The reality right now is that more credit is going more cheaply to larger businesses, and less credit is going more expensively to small businesses. The Banks would counter that they can only respond to the demand in the system, and the BoE report points to BIS data showing that applications for SME credit were 19% down in the six months to February than in the same period a year earlier. The Banks also say that many SMEs have had their equity wiped out and need equity investors rather than larger overdrafts. The Business Growth Fund should help.

So far, the record shows renewed credit difficulties for small businesses. There will be no sustainable recovery until this is solved.