Are Banks lending or not?

It is interesting to note that the traditional source of finance, the major high street banks, are complaining that they are not getting enough demand from small to medium sized companies, for the money that they have available to lend. The SMEs on the other hand are telling a different story and are complaining that the banks are just not lending. It is a confusing situation and as always there is some truth in both sides of the argument.

The banks have been told to improve their liquidity and their balance sheets and not too take risks, while at the same time they are being told to lend more money to get the economy growing again. It is a very difficult juggling act for them to satisfy these conflicting government demands. The recent facts and figures announced concerning the Merlin agreement indicate that the overall lending by banks exceeded the government’s target, and that £8 Billion more was leant to SMEs in the last 12 months than was leant in the previous 12 months. Yet still the SME lending target was missed by £1 billion, so the banks must do better. But at the same time SMEs put on deposit in the banks more money than they have done for the last 20 years. So over the last 12 months it looks as if the Banks have been lending more but not enough to satisfy the government while at the same time many businesses have decided to also not take risks and to conserve their capital until things start to improve. This is also shown by the fact during 2011 the proportion of SMEs using external finance declined and this was especial marked in SMEs of fewer than 10 employees. (SME Finance Monitor, Q4 2011). This seems to be backed up by a recent Deloitte report that indicates that British companies are hoarding cash because of economic uncertainty. This research shows that companies are holding £64billion more working capital than they need to fund day-to-day operations. If released it could be used to expand businesses or smooth downturns in the market.

An important question, therefore, is what are companies planning to do over the next 3 months and how does that differ from the previous 12 months? The SME Finance monitor, compiled by BDRC, throws out some interesting facts. Their findings are based on more than 15,000 telephone interviews conducted among UK businesses with a turnover of up to £25m between February and December 2011.

The most important finding was that 14% of SMEs are planning to apply for finance within the near future. At the same time they discovered that in the last quarter of last year fewer companies applied for new or renewed overdrafts facilities than in Q1-2 last year and there was also a decline in loan applications. The overall figure for applications for new and renewed facilities stands at 9% for Q4 compared to 15% in Q1-2. So the Banks are correct in saying that last year they were getting fewer applications.

It is interesting also to note from the monitor that there were  signs that improvement in terms of the number of loans being improved. While applications made in Q4 2010 or Q1 2011 were less likely to succeed, there was an improvement in Q2 2011 that was partially maintained in Q3. Over draft success rates were at 79% and loan success rates stood at 63% Automatic renewal of overdrafts increased overdraft success rates to a staggering level of 93% in Q4. Another revelation in the monitor shows that over the last 12 months 78 % of SMEs neither applied for finance, nor wanted it. This was up from the 68% in Q1-2 2011.

This improvement in access to finance seems to be continuing . The second quarter of 2012 has already seen some improvement in credit conditions for Britain’s manufacturers, according to a major survey published by EEF. The Q2 Credit Conditions Survey has shown that the availability of finance increased for more companies during the past two months, albeit at a higher cost. This survey has shown improvements across several measures of the availability of finance. A stronger balance of companies (4.3%) reported availability of new lines of borrowing during the last two months and encouragingly a positive balance of companies (+1%) reported improved availability of credit on existing arrangements, the first time there has been a positive balance since Q3 2007. But the balance of companies reporting an increase in the overall cost of credit still remains firmly in negative territory and has worsened since Q1 of this year, to 21.2%. This appears to be driven by fees and other costs of lending, with a higher balance of companies (16.2%) reporting higher fees on existing borrowing.

My own experience has shown that the banks are willing to lend money to good companies, with strong balance sheets, that are profitable, where the directors accept the need for personal guarantees and where there is a specific reason for the loan that will enable the company to grow. General working capital and cash flow needs are not normally reasons for lending. There is no money for those companies that are not making money, with negative balance sheets, no appetite for personal guarantees, and who already have arrears with HMRC. The problem is, however, that the World is not just made up of good and bad companies. There is a layer of companies that are neither good nor bad, those sit in the middle and are finding it hard to raise the growth capital that they need.

It seems clear, therefore that the banks are lending more money than previously and that SMEs having gone through a phase of consolidation are begging to look for additional capital to grow their business. If you fall into the category that the banks will lend to then you are fortunate, but if you fall into the middle layer of not quite being good enough yet, where do you go for the growth funding that you need? This will be the subject of next month’s blog.

 

Written by Peter Kelly

Peter Kelly
Pegasus Funding Resources
01932 244810
peter.kelly@pegasusfunding.co.uk
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