Misleading Data – The Truth Behind Project Merlin Figures
Originally published on Entrepreneur Country, 15 November 2011.
Following a period of discussion between the Government and the major UK banks, known as ‘Project Merlin’, a statement was made by the banks on 9 February 2011.As part of that, the banks stated a capacity and willingness to lend £190 billion of new credit to business in 2011, with £76 billion of this lending capacity allocated to small and medium-sized enterprises – 40% of the total lending target.
The Q3 2011 Project Merlin figures released today show that the major banks have once again failed to meet their quarterly targets. Banks lent a total of £57.4m to non-financial corporates, with £18.8 billion of that figure going to SMEs. The SME lending target for Q3 was £19 billion.
Some may argue that the numbers still look good – a shortfall of £200m is not too bad. Couple this with the banks’ insistence that demand from SMEs for debt is low and the numbers looks almost rosey.
However, some serious cracks appear when we dig a little deeper, cracks that cast concerning hazards for business on the road to recovery.
The obvious first: the amount lent to SMEs in Q3 is 8.3% less than the previous quarter. Considering seasonality, demand for capital tends to increase in Q3 and Q4, principally as the business machine gets back into gear after the more relaxing summer months, gearing up for year end.
Proportionately and logically, given the intrinsic incentives of proposed capital adequacy regulation under Basel III and the Vickers report, it is clear that banks are shifting their lending strategy to more reliable credits: larger corporations. The proportion of lending to SMEs as a percentage of total lending in each quarter is Q1:35%, Q2: 38%, Q3: 32%.
Now the crunch: lending numbers reported by the BOE are on a GROSS basis – i.e. inclusive of existing facilities that are rolled over. Considering the onus on stimulating the economy and the widely repeated statement by senior politicians and economists that SMEs are the lifeblood of the stimulus, one would be fair to assume that more new money is being lent each quarter than is expiring as facilities are closed. WRONG.
Simple math: Previous quarter’s lending + new lending – expired lending = current quarter gross lending.
For Q3: £20.5 billion (Q2 gross to SMEs) + new lending – expired lending = £18.8 billion
New lending – expired lending = -£1.7 billion
Expired lending exceeds new lending by £1.7 billion!
For clarity: Banks did not make £18.8 billion of NEW money available to SMEs in Q3. In fact, they lent less new money to SMEs then was paid off by SMEs; £1.7 billion less, 9% of total lending for the quarter.
Without question, a reasonable percentage of facilities will have been rolled over. For illustration, let’s assume £10 billion for simplicity, though I hazard a guess that number is far greater. That would mean expired facilities totalled £5.25 billion while new lending equalled £3.55 billion.
Certainly, reduced confidence in growth and the economy as a whole does make SMEs cautious in their ability to service debt. This is further expounded by the perception, recently corroborated by the Federation of Small Business, that banks may pull credit lines at short notice or change the terms of lending agreements. SME facilities will be the first to be impacted should banks need to shore up capital themselves due to issues in other areas of the bank.
The banks are no longer the most effective means for SMEs to access capital. A number of new innovative services are coming to market to help address the pain felt by SMEs. These services seek to positively disrupt the industry by providing more power to and better meet the needs of the SME consumer. Services such as Funding Circle (www.fundingcircle.com ), MarketInvoice (www.marketinvoice.com ) and Zopa (www.zopa.com , consumer loans), have all made a splash. Recent figures suggest that as much as 10% of consumer lending in the UK may be facilitated by P2P services. Businesses, particularly SMEs should take note.
However, with this first wave of innovation, imperfections are inherent and there is undoubtedly room for further refinement of service to provide the best fit solution for SMEs. We, at EuroTRX, have sought to identify the gaps in order to shape a more robust and sustainable solution for SMEs. We don’t believe alternative loans are the answer. We believe that the predominant need is for working capital, and that an invoice exchange, delivered in the right way, will best fulfil the need.
Invoice financing in its current guise accounts for less than 5% of business funding in the UK; a criminally low percentage considering the relative benefits of invoice finance to traditional debt finance such as loans and overdrafts. No interest to pay that further impacts cash flow, more effective use of balance sheet assets, inherent security for funders (invoice buyers) thus nurturing more demand, and generally improved financials and ratios for the business borrower (invoice seller). The barrier has always been the complexity of the delivered service, the unnecessarily high cost and the lack of awareness of invoice finance. EuroTRX, when we launch, will change these dynamics for the better, delivering a more transparent, lower cost, sustainable and flexible service to SMEs by connecting them with non-traditional non-banking sources of finance in a user friendly online auction platform. We are determined to deliver the right solution for UK businesses.