England’s business model was besieged Friday as loans to small business fell by over $700 million during the first quarter in 2014. Ongoing efforts to boost credit and credit availability have been unsuccessful and the economy is taking a hit as Threadneedle Street’s latest focus failed to encourage small business lending. Overall, financial lending to businesses dropped $2.7 billion during the first three months and some observers are blaming this as some banks trapped in the ongoing financial crisis turned away from commercial property lending.
The latest bout of bad news for smaller companies arrived just as the government prepared to announce planned legislation which would force banks who refuse loans to small borrowers to refer them to other, alternative, lenders. The country’s Treasury ministry is trying to support alternative finance for small shops to stop a lack of credit from stifling the recovery.
The director of the British Chambers of Commerce, John Longworth, said that lending across the UK has shrunk despite the extra funding which has been turned towards business lending. Longworth went on to say that this provides further evidence that Britain’s finance system for businesses may remain broken.
While larger and more established businesses don’t have the same challenging in finding lines of credit, the real test has been the availability of credit to young and rapid-growth companies. Many of the younger firms have remained frozen out of the market and cannot get the financing they need. In Britain, smaller businesses are the driving force of the economy.
A lending drop could have been worse if the financing plan had not been extended and the extension came at a time when the economy started to pick up steam. The central bank launched the Funding for Lending (FLS) two years ago to allow banks cheap funding which could be passed on in the form of cheaper loans. As fears mounted over the potential break-up of the eurozone, costs soared and growth has fallen far short of the projected $80 billion.
Participants in the FLS are permitted to access $5 of funding for every $1 lent to small businesses until January 2015. The data recently released shows that the taxpayer-funded Royal Bank of Scotland gave preferential treatment to larger companies — totaling $774 million. Lloyds remained the largest lender to small businesses with loans growing by $536 million.
Funding for Lending
FLS, a joint effort of the Bank of England and Treasury, had its initial goal to try to boost bank lending to households and small businesses by as much as $70 billion. Britain changed the rules in January 2014 and made this type of funding unavailable for mortgages. Facing a downward spiral of lending and borrowing, banks and construction firms are able to tap into the funds until January 31, 2015.
The point of the plan was to encourage commercial banks in the UK to borrow more and cheaper money so they would have the funds to, in turn, lend to small businesses seeking funding. There is a strong debate in Britain about the success of the scheme. Some banks are still unwilling to lend to businesses and others are unwilling to take on new debt and have begun paying back loans.
Whatever the outcome, families and individuals and save have experienced an unforeseen effect of FLS. Cheap funds from the bank means that lenders don’t have to work as hard to get funding from the public. The result has been an unanticipated drop in the interest on savings account with the payout now less than 3 percent.
If the lending noose continues to tighten, small shops in England may find access to credit the only difference between staying open and pulling the shutters one final time.
By Jerry Nelson