The UK banking sector is constantly criticised for its lack of appetite to lend to small and medium-size businesses, but that criticism may be a little simplistic, as John Barker from Randall and Payne explains: “The banks reflect the current difficult economic climate both in the UK and worldwide and are to some extent ‘caught between a rock and a hard place’, being asked to reduce their risk while at the same time lend more into the small and medium business sectors, two demands very much at the opposite ends of the spectrum.

Some claim the banking sector has been reticent to support and provide finance for many businesses desperate to borrow money. Other reports indicate that businesses’ appetite for borrowing money has dropped, with businesses consciously reducing financial gearing to lower the risk of default and interest rate exposures and lacking confidence in the banking sector. Tax-payers have long memories, so it’s a big issue for the banks that £50 billion of tax-payers' money was used to ensure there was no banking collapse.

Whatever the causes, lending to SMEs is a major concern and is forcing many previously strong operations to cease trading. The previous government placed significant pressure upon the banks to increase liquidity and funding for small to medium-sized businesses, but there is still little sign of this occurring. The government has now pledged extra support to businesses, extending the current Enterprise Finance Guarantee (EFG) facility to enable it to support up to £700m in bank lending to viable small businesses, up to March 2011.

But figures show EFG lending in the 6 months to March has actually fallen by 23% over the previous 6 months figures and the Bank of England’s ‘Trends in Lending’ figures to April 2010 show overall lending to UK businesses remained negative for the 13th consecutive month (at -3.8%/annum), so the problem of lending proposals not being submitted by borrowers, or not being approved by the banks, has yet to be addressed.

In order to reverse these trends, it’s time for the entrepreneurial spirit to come to the fore and to that end the importance of business confidence cannot be over emphasized. Gloucestershire’s small businesses need to have the confidence to approach banks for lending and with £700m of Government backing the banks should now have more confidence to encourage and support our local entrepreneurs.”

To discuss the availability of EFG loans or other forms of funding, please contact our banking expert John Barker on 01242 548600.