The picture is a mixed and somewhat confusing one in the lending space for business loans to SMEs. There was no annual reduction in lending in December 2016 and January 2017, as noted by examining recorded bank lending records from the Bank of England. However, the aforementioned consecutive months saw a £536m reduction in total lending.
The situation is little cloudy though because not all lending channels experienced a sudden (or gradual) decline in lending over the same period. Let’s examine this curious situation to discover what has been going on and what it means for business owners.
Uncertainty with Brexit
While the primary concern for businesses in the UK is that they’re not sure how the regulatory framework, business conditions, and trade will work when outside of the European Union, UK banks are also acting jittery. In the same way that banks globally hit ‘pause’ on any types of risky lending when the financial crisis happened in late 2008/9, there are clear signs now that banks on UK shores are doing the same thing because of Brexit uncertainty.
You would think that it would be business owners who would question planned expansion plans or reduce their workforce to cut costs and increase profitability to add to cash reserves, but that’s not been happening. Companies across the UK are seeking to expand into new markets and take advantage of competitors cutting back by pushing ahead to grab a more significant share of the market. As a result, their lending requirements haven’t slowed in response to Brexit; it’s just different companies that are seeking business loans for LTD companies to take advantage of a growth opportunity.
Funding for Lending Scheme
Seeing a slowing economy and other concerns, the esteemed Bank and England and the HM Treasury jointly launched the Funding for Lending Scheme (FLS) initiative to encourage UK banks to continue lending to small businesses. The scheme started on 13 July 2012. It was initially planned to run only until 24 April 2013, but it has been extended many times, first on 28 November 2013, then 2 December 2014, and finally 30 November 2015. The closing date that small and medium-sized enterprises can borrow money under cover of the scheme is now well into January 2018.
The idea behind the FLS was to encourage UK banks to lend to local businesses to avoid choking off their necessary working capital and provide funds for expansion. It was felt that without some encouragement by the BoE, some high-street banks would be reticent to continue lending initially with the downturn in the UK economy and, subsequently, because of the growing uncertainty following the vote to exit the European Union at a future date.
The scheme included specific additional incentives for lending to SMEs over large corporations, which the system wasn’t intended. The HM Treasury pledged to provide the capital for banks to continue lending to SMEs. Both banks and building societies could participate based on their record of lending performance, which would determine the number of loans they could access and the price that would be paid for the funding line. The HM Treasury would allow participants to borrow some UK Treasury Bills when they provided sufficient collateral (based on the Discount Window Facility).
The FLS worked to a degree, however, not every bank and building society maintained the same levels of lending to SMEs. The declines in the bank lending numbers confirm this. However, private business lenders like Merchant Money with its range of both secured and unsecured business loans continued to support UK business with a streamlined online application for business funding.
Lenders working in the peer-to-peer (P2) arena provides another avenue for company owners looking for new money for their established (and just starting) business. P2P loans tend to be much lower value and use different qualifying criteria than more traditional business lenders.
Issues, like making late payments and knowing how to stop legal proceedings against a recipient of a loan when they’ve fallen behind on payments but are later able to catch up, are less clear with P2P in an industry that’s still establishing itself. Some business owners prefer to avoid this type of lending facility on a P2P platform because of uncertainty about its sustainability and what would happen should the platform suddenly close due to financial problems. How are loans maintained and cleared when there are 200 micro-lenders for a single business loan, and the platform has gone dark?
The good news is that for business owners in the UK, there are plenty of funding options for opportunistic entrepreneurs seeking to move quickly into new markets or expand their presence in an existing one. No longer are they held back by the stodgy attitude of their local bank manager towards SMEs.