UK banks want government assistance to ease funding
Higher capital needs forces them to cut loans to smaller borrowers
H igh street banks need more government help to lend to small businesses, the head of the British Business Bank has said.
Keith Morgan, chief executive of the state-owned bank established to improve the lending market, said alternative sources of finance such as peer-to-peer lending and equity crowdfunding had not yet made up the shortfall left after banks retreated because of the 2008 financial crisis. “Bank lending is still very important to small businesses. We have seen encouraging signs of growth from alternative lenders [but] they still represent something very small,” he said.
Traditional bank lending accounted for about 75 per cent of the gross funding for small and medium businesses in 2014. But net bank lending fell by £3 billion to leave £167 billion outstanding at the end of the year.
Peer-to-peer lending grew by about £400 million to £770 million in the year to October, according to the bank. Equity crowdfunding was negligible. Morgan said many smaller businesses were “discouraged” from applying to banks by previous rejections or the cost of loans.
Alternative sources supply 25 per cent of lending to small and medium businesses. The BBB’s main aim is to double this proportion. Bank loan alternatives include bonds, peer-topeer lending and asset-based finance, whereby banks and others advance money against assets such as equipment and invoices.
The bank has backed asset finance and total advances by the industry were £19.3 billion at the end of the third quarter of 2014, a record, and up 12 per cent on the year before. The BBB recently provided £5 million to Kingsway, a Cheshirebased asset finance specialist, increasing the company’s leasing capacity by up to 10 million pounds. It has also offered money through peer-topeer lending platforms such as Funding Circle.
Moving its focus
Morgan said the bank was moving its focus from start-ups to mid-sized businesses. “We have increased the size of venture-capital funding we can do from £2 million to £5 million. There will be a general move towards helping companies to grow, not just starting up companies.”
He said the overall picture was positive. “Two years ago it was all about working capital. Now it is split between people seeking finance to invest and new equipment or assets for business expansion.”
Banks needed more support because regulators had increased the amount of capital they must hold against business loans, he said.
A 1 per cent increase in the regulatory capital level results in a fall in lending of up to 3.6 per cent and a rise in interest rates on loans of between 4.5 and 25 basis points, the bank says.