Bank lending to small businesses falls by £400m

Small firms are still struggling to access cash from the banks, according to the latest Trends in Lending report, out today.

The Bank of England report, which consolidates all available lending data to paint a fuller picture of the lending landscape, showed that net lending to small and medium-sized enterprises (SMEs) through the Government's Funding for Lending scheme was down in the second quarter of this year, contracting by £400m.

The FLS scheme is failing to benefit large firms too, with lending is down £3.9bn to corporates in the three months to September 30.

The FLS was launched to help banks release loans cheaply, mainly to SMEs.

According to the Bank's most recent report on small business lending, £170bn was loaned out in July, and £169.5bn in August.

The half-year fall is less steep than in previous quarters, however. In the previous three months of the year, lending dropped by £700m – but reflects a continued lack of available finance for SMEs.

Credit availability for small businesses has also fallen, according to the latest Credit Conditions survey, with demand for credit now far outstripping availability.

According to a recent report from the Federation of Small Business, 52pc of small firms now find the availability of credit “poor” or “very poor”, while around half of respondents state that credit is unaffordable.

As bank lending continues to fall, SMEs are increasingly turning to alternate forms of finance. Flows of peer-to-peer business lending from providers such as Funding Circle increased in the first half of 2014, reaching a total of £300m.

Small firms are increasingly seeking out new forms of finance; the number using only bank loans, overdrafts or credit cards has declined by almost 10pc to 20pc, according to the most recent SME Finance Monitor.

“Net lending to small businesses is still falling, which is disappointing given their immense importance to the economy," commented Samir Desai, founder of Funding Circle. "Traditional banks are hamstrung by legacy issues, limiting their capacity to lend.

"The unprecedented level of demand we are seeing from creditworthy firms at Funding Circle suggests it's not demand for finance that is falling, but instead demand for a traditional bank loan."

Marcus Grimshaw, chairman of the National Association of Commercial Finance Brokers, added that banks must do more to support the UK’s growing businesses.

“Government initiatives – such as the SME lending referral process – need to be pushed to the top of the agenda to ensure that UK businesses ripe for growth don’t suffer due to lack of funding,” he said.