Funding the great British recovery

After years of waiting, it finally looks like Britain is starting to recover from the financial crisis, growing at the fastest pace since 2007 over the past 12 months.

The number of people in work is at its highest since records began in the 1970s, inflation has fallen to 1.9 per cent, just below the Bank of England’s official 2 per cent target, and many economists are predicting that Britain’s economy could expand by an extremely respectable 3 per cent this year.

However, there is still one weak spot amid a mounting pile of positive data. Recent figures from Threadneedle Street showed that net lending to small and medium-sized enterprises (SMEs) tumbled by £1.2 billion in December.

This has been a cause for concern for some time, but there has been conflicting arguments over whether the country’s banks have been doing enough to boost lending to this sector.

Vince Cable, the Secretary of State for Business, Innovation and Skills (BIS), has repeatedly slammed the major banks for not doing enough to lend funds to these businesses, while Nick Clegg, the Deputy Prime Minister, also recently said that the arteries of the British banking system were still “too blocked”.

While only 37 per cent of SMEs planning to apply for finance believe they will get their bank applications approved, actual approval rates are a lot higher at almost 67 per cent

At the same time, however, the banks argue they are ready and willing to lend to small firms, but the demand is just not there. Alongside, the British Bankers’ Association (BBA), Royal Bank of Scotland, NatWest, Lloyds, Barclays, HSBC and Santander launched a campaign last month aimed at letting SMEs know they are a lot more likely to get finance than they think.

In particular, the BBA’s research found that, while only 37 per cent of SMEs planning to apply for finance believe they will get their bank applications approved, actual approval rates are a lot higher at almost 67 per cent.

“We’ve launched this campaign to let businesses know that they are a lot more likely to get finance than they think,” said Anthony Browne, the BBA’s chief executive. “This matters because more successful loan applications mean more orders for equipment, more new jobs and more plans to expand.”

As everyone waits to see if there is an improvement in bank lending this year, all eyes will be on the Funding for Lending Scheme (FLS), a joint initiative between the Bank of England and the Treasury, designed to boost the flow of credit in the economy.

They announced changes to the scheme in November so it would just focus on SMEs and not the mortgage market as many experts fear a property bubble is emerging, especially in London.

The FLS extension will continue to allow participants to draw from the scheme from February 2014 until January 2015, but household lending in 2014 will no longer generate any additional borrowing allowances. Instead additional allowances will now only reflect lending to businesses this year.

“The re-focus of incentives in the Funding for Lending Scheme towards supporting business lending shows that the government and the Bank of England recognise the difficulties faced by firms across the UK in accessing the finance they need to grow,” says John Longworth, director general of the British Chambers of Commerce.

“The real test for Funding for Lending has always been whether it is able to get credit flowing to young and fast-growing companies and long-term, non-equity capital to firms that want to expand. Unfortunately any improvement in credit availability is only being felt by ‘safe bets’, while younger, growing firms continue to struggle to find the finance they need to expand.”

Dr Cable has also announced a government-funded bank to help SMEs. The so-called Business Bank will bring together public and private-sector funds to address market weaknesses and failures. The hope is that it will unlock up to £10 billion for smaller businesses over the next five years.

It will work by part guaranteeing loans through traditional banks as well as some of the growing number of alternative sources of finance providers.

The Business Bank is currently operating in interim form out of BIS, but is expected to become an operationally independent institution, reporting to its own board in the latter half of 2014, once it gets EU state aid approval.

SMEs are also being encouraged to think about turning to alternative sources of finance instead of going to banks. These include peer-to-peer lending, angel investment and crowdfunding, to name just a few. The challenger banks such as Aldermore, Handelsbanken and Shawbrook are also growing in popularity.

One thing is clear – there is a lot to play for in the next 12 months if the recovery is to be sustained.