Small businesses feel the squeeze as bank lending falls by £700m

Mark Carney, Governor of the Bank of England (Getty Images)

The UK’s “broken” business finance system came under fire yesterday as Bank of England pundits showed that loans to smaller firms slumped by more than £700m in the first three months of the year, despite efforts to boost credit.

Threadneedle Street’s latest snapshot of its flagship Funding for Lending scheme (FLS) – refocused to encourage small business lending – fell £723m among the 36 bank and building society participants in the first quarter. Overall business lending fell an even greater £2.7bn between January and March, although this is partly due to some of those banks caught by the crisis shying away from commercial property lending.

The fresh blow for smaller firms comes as the Government prepares to announce plans for legislation in next week’s Queen’s Speech to force banks who turn down credit to small companies to refer them to alternative lenders. The Treasury wants to encourage alternative sources of finance to SMEs to prevent a lack of credit choking off any recovery.

John Longworth, director general of the British Chambers of Commerce, said: “It is concerning that lending to firms across the country has continued to contract even though the Funding for Lending scheme has been refocused towards business lending. This provides further evidence that Britain’s business finance system remains broken.

“Although more established firms have little difficulty in accessing the finance they need, the litmus test for the Funding for Lending scheme has always been whether young and fast-growing businesses are able to get the finance they need to expand and drive the recovery – and unfortunately many of these firms remain frozen out of the market.”

Phil Orford, chief executive of the Forum for Private Business, said the lending drop could have been even worse if not for the extension of the FLS, but added: “At a time when the economy is picking up there is no doubt the figures remain slightly disappointing.”

The Bank launched the FLS in August 2012 to allow banks to access cheap funding, as costs soared amid turmoil following fears of a break-up of the eurozone. The scheme has fallen far short of ambitions to grow net lending by £80bn, although lower funding costs have since reduced the incentive to tap the scheme. Banks and building societies have drawn down £43.3bn in total.

Participants are allowed to draw down £5 of funding from the FLS for every £1 of net lending to smaller businesses until January next year. But the detailed data revealed taxpayer-backed Royal Bank of Scotland growing lending to larger companies by £774m at the expense of small businesses, where its lending sank £737m. Lloyds was the biggest lender to smaller firms, expanding loans by £536m, followed by Santander, up £179m.

John Allan, national chairman of the Federation of Small Business, said: “There needs to be a greater focus by government and financial providers on making it easier for small businesses to access finance. We have been calling for the banks to open up lending to small firms and for the Government to break up the financial market to generate more competition among high-street banks and alternative lenders. However, today’s figures show that, in spite of credit being cheaper now, small firms are still coming up against invisible barriers to accessing finance.”