Lending to SMBs gets a boost

Thursday 1 August 2013

Lending to small businesses and sole traders saw the largest month on month increase since records began in 2011.

According to figures from the Bank of England (BoE), lending to SMBs rose by £238 million between May and June this year. This increased the total borrowed by SMBs to £170.4 billion in the month of June.

The rise is good news for self-employed earners and those running small businesses as it suggests that banks are becoming more willing to lend, given borrowing has fallen to both large and small firms since 2009. Monthly rises have only been recorded three times since the bank started compiling figures in the current form in May 2011.

Nevertheless, economists and the BoE have stressed that just one month’s data is not yet indicative of a trend and so people should be ‘cautiously’ optimistic.

"The rise fuels hopes that banks are now becoming more prepared to lend to small businesses," Howard Archer, chief UK and European economist at IHS Global Insight, told the BBC.

Nevertheless, the record increase has come as a sign that the UK economy may be on the right track and lending to businesses may get easier. Since the recession borrowing has been a challenge for firms in the UK, and particularly so for small businesses and the self-employed, as banks tried to limit their risk exposure.

The rise was recorded two months after the Treasury and BoE extended the Funding for Lending scheme by a year, to January 2015. It also further incentivised net lending towards SMEs. As SMEs contribute a significant amount to UK GDP, increasing the opportunities for small firms is a key way to get the economy back on track.

Mr Archer said the government's Funding for Lending Scheme (FLS) may now be helping small businesses more than previously.

"The Funding for Lending Scheme could be starting to have more of a positive impact," he said.

When the scheme was announced a year ago, many voiced concerns that it would only further increase the funding available to big companies, without improving the outlook for small businesses. However, these figures indicate that may not be the case. The scheme works by lending to banks at a lower rate on the proviso they, in turn, give that money to small businesses and sole traders.

However, overall lending to SMEs in the past year has continued to decline despite the recent rise, dropping 3.3 per cent. In addition, lending to big firms fell on both a monthly and an annual basis. In total, UK businesses are borrowing 3.7 per cent  less than the same time last year and 1.3 per cent less month-on-month.

Lending to large non-financial businesses fell by £1.5 billion in June, compared with a fall of £585 million in May.

Other figures released at the same time from the BoE reveal that mortgage lending increased to a 14-month high of £981 million in June. Borrowing for homeowners has also been incentivised by the Funding for Lending scheme, and the Help to Buy project.

By Victoria McDonnell

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