The recently issued “Trends in Lending” report from the Bank of England reiterated the message that net lending to small business continues to fall off.
The report exposed a divergence in the willingness/capacity to secure funding of small businesses and larger businesses. The sizeable levels of demand for credit from larger businesses has caused interest rates to steadily decline, as competition among the various finance providers has heated up. But the smaller end of the business spectrum tells a different tale. Demand for funding among SMEs is falling off, and the cost of finance has thus been rendered largely static.
Graeme Marshall, Chief Executive of FundingKnight, commented on the situation:
“The difference in demand from large businesses and SMEs is a portent for the economy. Large businesses are now starting to invest to push ahead, but reluctance remains among the small businesses that account for more than 50 per cent of GDP.
“Is it that we’re still not out of the recessionary woods and confidence among SMEs is lagging – or is it that small businesses have become inured to borrowing by the experiences of the past few years, crushed by declines and onerous conditions, and not knowing where to go for fair finance? If it’s the latter, the establishment, via its restrictive lending policies, stands guilty of putting a handbrake on the growth of SMEs and that of the economy at large.
Borrowing for growth is a positive decision by an SME as it provides leverage that wouldn't be achievable from cashflow and retained profit alone. The extra money can be used for the purchase of property, income producing plant and machinery or for significant strategic development, such as an acquisition. These can all lead to more profit, more jobs and more wealth creation.”
Naturally, Mr. Marshall sees the burgeoning alternative finance space as the elixir to the nation’s credit-starved businesses. While small business lending from established players continues to nosedive, the contributions of the alternative players are becoming increasingly impactful. Indeed, you might argue that the two forces – one fading, the other growing – have now met in the middle, and that the alternative business funders are steadily returning us to pre-2008 small business credit conditions. AltFi Data recently provided a visualization of this phenomenon – in the wake of the latest Funding for Lending Scheme update – which is pictured below.
The most recent Bank of England Credit Conditions Survey reported that 77% of SMEs would not be seeking bank loans or overdrafts in Q3 2014. Similar figures have been recorded in the previous 4 quarters. For Mr. Marshall, a widespread lack of confidence around seeking finance is at the heart of the problem:
“If we can remove the fear of rejection, we can release the brakes. And if we can release the brakes on 50 per cent of GDP, we can look forward to a much longer recovery.”