A recurring theme amongst lenders over the last few years has been the lack of suitable borrowers for their funds. It is worth picking this statement apart however, as there are two distinct components.
[icon_list_item type=”arrow-right”]Lack of demand from small and medium sized businesses[/icon_list_item]
[icon_list_item type=”arrow-right”]Lack of credit-worthy business applying for funding[/icon_list_item
The Government’s extension of the Funding for Lending scheme doesn’t deal with either of these pressing issues.
The first problem is a function of confidence. A prudent business owner will always have one eye on his forward order book. With a fragile global economy he understands that circumstances can change quickly. The primary driver of investment in any field is confidence and with daily headlines worrying about the Eurozone, sovereign debt levels, downgrades, job losses and the like, general business confidence is in short supply.
The second component, impaired credit from borrowers, is much more troubling. Lenders, bludgeoned by the public and by opportunistic politicians, are highly sensitive to accusations of reckless decision-making during the credit boom. Credit committees (acting on direct orders from on high) are in no mood to ignore the recent past.
Those business owners who have survived the last five years of the Great Recession are often nursing damaged balance sheets. The confluence of these two situations has given us an extraordinarily tangled and frustrating impasse. Many businesses that have traded profitably for years and years now find themselves in the naughty corner after a couple of years of losses. They are now perceived as credit risks.
This is a significant problem and one that, unfortunately, initiatives such as Funding for Lending do not address. The Government needs to attack this problem with vigour.
Creating an environment to restore confidence is not wholly in its power and this will have to mend with the general world situation, however working with lenders to re-define lending criteria is a real option.
One way to start this work is to encourage funding options that can be more flexible about the way that a business is viewed. Options including peer-to-peer lending and pension-led funding among others should be embraced and encouraged by Dr Cable and the current administration.