Fall in Lending to UK Businesses Slows Amid Signs of Recovery

Lending to UK businesses fell by £500m in the three months to February according to latest Bank of England figures – but leading economists insist the news is not all bad

Despite easier credit conditions and increased assistance from the Bank of England and government to secure funding, the Trends on Lending report, published this week noted that “the annual rate of growth in the stock of lending remained negative”.

It did, however, point a slowing down in the fall of lending, with net lending to small and mid-sized businesses – gross lending less repayments – close to zero in Q4 2013, having been negative for the same period a year before. And the fall was far less than the £3.3bn reported in the three months to November.

The report also highlighted the rise of alternative sources of finance with agents reporting “growing use” of peer to peer lending, crowdfunding and venture capital funds.

“In recent discussions some major UK lenders noted the presence of alternatives to bank lending, such as non-bank lenders,” the report stated. Chancellor George Osborne announced in the 2014 Budget Report that the government would continue to encourage business investment as this was essential for the economy to continue to recover.

The Bank has been working towards encouraging lending to businesses, with the Funding for Lending Scheme launched in 2012 to allow lenders to borrow at low rates if they provide loans to companies and by increasing available credit to businesses in the first three months of the year. Applications, however, remain low. Around 80% of small and mid-sized businesses did not seek finance at all in the year to Q4 2013, the SME Finance Monitor found.

Nevertheless, economists believe the lack of growth was a result of businesses seeking cheaper sources of funding, which can be viewed as a sign that the financial market is strengthening.

Furthermore the Bank’s report and the Banking Trade Association’s chief economist, Richard Woolhouse, noted that repayments from businesses had a part to play in the net drop in lending.

Woolhouse added that new lending was actually increasing. “Businesses are building up record cash reserves and paying off more of their debt, leading to an overall decline in net lending… seven out of 10 applications for business finance are approved so there’s rarely been a better time to approach your bank.”

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