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March 20, 2013 4:41 pm
Why has the credit pipeline dried up?
Banks blame lack of demand, companies say banks are overcautious and require too much collateral. They add that UK businesses are not approaching banks because they expect to be refused. The problem is probably a mixture of the two.
According to the Federation of Small Businesses, the share of companies seeking finance has fallen from 23 per cent to 20 per cent over the past year. But the share of businesses that had their applications accepted also dropped from 45 per cent to 41 per cent.
What effect is the blockage having?
Business investment has suffered, though how much of this is because of companies’ uncertainty about demand and how much to the banking system is debatable. Investment is still 10 per cent below its 2008 level. Some believe there must be a pick-up soon because plant and equipment are wearing out.
What has been done to tackle the problem?
The government has launched several efforts to get credit flowing, including Project Merlin in 2011, which set targets for lending. Later in 2011 came the national loan guarantee scheme, known as credit easing, which aimed to lower the cost of finance for small companies. It had little effect and was superseded last year by the Funding for Lending Scheme. This was structured so that as net lending increased, the charge for funds from the Bank of England would fall.
Why have these efforts failed?
FLS has had more effect in improving availability of mortgages than increasing lending to small companies. The BoE says it is too early to judge FLS because benefits to companies will take longer to pass through the system. Business leaders say banks are reluctant to lend to fast-growing companies without a strong borrowing record because they are too risky.
What more can be done?
Ministers have promised to put FLS “on steroids” by extending it. The British Bankers’ Association has suggested widening it to non-bank organisations such as asset-backed financiers, particularly those that already lend to small businesses based on receipts, business property or other assets. Business leaders want the chancellor to do more in the Budget through a planned state-backed business bank. That is a long-term initiative to widen sources of finance, but Vince Cable, business secretary, has promised it will start investing this year.
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