Fumbling for Lending

Of all the confusing statistics flying around recently this is one of the most troubling (here clearly described in the FT).

[blockquote]“After falling in February and March, net lending to private non-financial companies dropped another £3bn in April, pushing the annual decline back down to 4% after recovering earlier this year.”[/blockquote]

The statistics also reveal that repayment of loans to businesses have continued to outstrip new lending.

There is clearly some kind of black hole into which the Government’s well-intentioned Funding for Lending Scheme (FLS) is quietly disappearing. With the announcement that this under-performing initiative is to be extended until the start of 2015, one is forced to ask, why?

The provision of funds to the banks with an unholy quid pro quo, whereby the banks can borrow increasing amounts of funds if they lend to SMEs, is clearly not tasty enough for the nation’s lenders.

In fact, from what I can see, the only logic behind the extension of the scheme is to reassure bankers that there is not going to be an uptick in their borrowing costs anytime soon.

With base rates held at artificially low levels and the supposed flood of cheap money through the Government schemes such as FLS, one might expect the newspapers to be full of stories of business owners having to build new storage facilities to keep all the cash being thrown at them.

And yet this seems not to be the case.

We are, of course, operating in the most unreal of financial environments ever seen in this country. A great economic experiment to counter the effects of the Great Recession. Only in Japan and the United States have the authorities sought to suspend reality with greater vigour.

We all know how vital business confidence is to the overall economy; how business confidence is the un-seen driver of growth through investment. How easy is it for any business owner to be confident under the current circumstances?

And who can blame them?

Funding for Lending – chickens and eggs

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.