Commentators were quick to pick up on the implications of this for business, namely that it could result in further restrictions to the flow of credit for small firms already suffering from years of cash famine if the banks are forced to divert cash to bolster their funds. Even Business Minister Vince Cable suggested this might be a causal effect if the BoE was correct with its sums.
And it is a real and valid concern. The banks don’t have a particularly good track record of putting the needs of their small business customers ahead of their own. It’s why we have seen such government initiatives as Project Merlin, unsuccessful as it was, as an attempt to get credit flowing.
Even the more recent Funding for Lending scheme has not hit business lending targets, the government candidly admitted in March it needs ‘supercharging’, although quite how they plan to do this we have still to hear anything concrete.
As if we need another example that bank lending is not yet where it needs to be, just recently BIS announced the first £300 million of lending as part of their business bank project. The concern here though has to be that if the banks do further slim down SME funding to swell their own depleted coffers, the business bank will be merely plugging any new shortfall. The hope is that bids for some of the £300m on offer will be ones offering patient capital, an area of finance not readily available from the high street. By patient capital we mean loans over a longer period of time, allowing businesses to use their money for medium and long term plans.
That would be a real blow to business too, who largely seem to welcome the notion behind the scheme. Recent research by the Open University’s business school showed 49% of SMEs thought yes, an institution of this kind would be beneficial to firms in their sector increase investment. 29% said no, and 22% were undecided.
It’s the Forum’s view that SMEs really ought to start thinking outside the box when it comes to their credit needs. After all, the banking sector is bigger than just the traditional ‘big four’, there are alternatives.
While we have long argued and maintain that what we really need is for traditional lenders to resume proper business lending with a meaningful return to relationship banking, that seems a long way off right now.
So where to look for credit if the lending situation in the UK becomes even more choked? Challenger banks could certainly offer a short to medium term solution for business lending, and Sweden’s Handelsbanken is the standout example: a full-service bank operating in the UK since 1982, now boasting 150 UK branches, and with additional ones opening at a rate of one a fortnight.
And if you thought relationship banking was dead in the UK, think again. Unlike the model now common in most high street banks, each Handelsbanken branch manager has the authority to make their own lending decisions, and is also ultimately responsible for the branch’s balance sheet. In places like these the bank manager is still ‘the man’.
While this may sound like an old fashioned notion, this used to be the norm in British banks, only to be replaced by the risk averse, tick box mentality as the credit crisis erupted. There are a few signs from politicians this is the way they want things to return. The Labour Party is supporting a similar system to the regional Sparkassan (check spelling) banking network in Germany, whilst the business secretary, Vince Cable, recently asked banks to provide postcode level data in order to better understand where geographical gaps lie.
As we now see, this approach all too often means the likes of start-ups, rightly viewed as risky, find their loan applications fall at the first.
A real issue in the UK though is that too few small businesses are even aware of the viable alternatives out there when it comes to lending. We believe this is certainly something the government could do more to help with. They’ve thrown everything at attempts to leverage domestic lenders to move up a gear, attempts though which have thus far failed. Maybe a change of tack is required.
So if the banks can’t, or won’t lend, the government, who must continue to plough ahead with initiatives such as the business bank, should also look at promoting those other non-mainstream lenders who will. This is certainly an approach we will continue to argue for in columns such as this.
