Bank of England statistics show that lending to small businesses has fallen 5 per cent in the year up to August, despite the banks pledging to make more resources available in this area.
Evidence suggests that many small businesses are stockpiling cash for fear of losing their overdraft or other debt facilities. Lending to businesses over all shrank by roughly £2.5 billion between June and August.
The Bank of England’s survey showed that credit conditions had slightly improved for small companies and changed very little for medium sized enterprises. The demand for credit from small/ medium sized businesses has fallen significantly over the same period.
Lenders are blaming the bleak economic outlook for this, saying that companies don’t want increased debt when they are so unsure of what lies ahead and predicting a climate of ‘reduced risk’ over the coming months, with companies not spending on anything beyond the essentials.
Lending costs for large companies have continued to fall and have remained steady for medium enterprises, for the smallest companies; however, there is some evidence of loan rates drifting upwards. UK banks have also warned that rates are likely to increase while there is no solution to the Eurozone crisis, as increases in the wholesale cost of borrowing begin to affect consumers.
The Confederation for British Industry has suggested that businesses need better alternatives to traditional lending, such as improved access to venture capital or bond markets, in order to facilitate growth, and is urging the government to help businesses take this route which it says could add as much 0.26 per cent to Britain’s economic growth over the next decade..