Banks win again – SMEs are losing the fight for capital
2012 was a tough year for small businesses. The Eurozone crisis rumbled on and economies stagnated or contracted. Government initiatives, such as the Funding For Lending (FLS) scheme in the UK have done little to relieve the cash flow pressure on businesses that, as Vince Cable, Secretary of State for Business, Innovation and Skills, trumpets, “are the lifeblood of the UK economy”.
The latest Bank of England figures show that net lending in the last three months of 2012 was £2.4bn less than in the preceding three months – despite banks participants in the Bank of England’s funding for lending scheme drawing down £9.5bn of available funds. The banks have ignored the cries of all around them to do what they are supposed to do – lend.
The release of the figures has exposed the FLS to an inevitable backlash from the media as well as from consumer and business bodies. George Osborne, Chancellor of the Exchequer, set up the Funding for Lending scheme as a solution to previous schemes, such as Project Merlin, which failed to deliver credit to cash-strapped businesses. However, the conditions under which banks could access cheap capital included large corporates tucked away within the small print, a more profitable and less risky customer segment for banks. The broad criteria have been exploited to the benefit of the banks and the detriment of small business.
Under banking regulation, lending to SMEs carries a heavy capital cost to a bank. On top of this, the return on investment to assist SMEs is also very low. As a result, the service small businesses receive from their banks is equally poor; getting a bank loan is like juicing a stone and the process and experience are far from easy or friendly.
The government has repeatedly failed to rectify its policy errors and implement the right incentives for banks to lend. The banks have received cheap and easy access to capital in exchange for only a token gesture to help the 95% out of 4.8 million businesses classed as SMEs in the UK.
Fortunately, a plethora of New Finance firms are stepping forward to challenge the oligopoly of high street banks and provide a real and transparent alternative source of funding and financial services for SMEs. These technology firms were born to better support businesses with a vision to deliver a fairer and more accessible portfolio of financial services.
The government is waking up to the value of these challenger services, pumping £110m to alternative finance schemes for lending to SMEs. This is the best indicator yet that these firms are now in the mainstream. Given the clear failure of the Funding for Lending scheme, firms such as Funding Circle, Squirrl and Funding Knight may offer the lifeline that small business, and our economy, needs.