U.K. Scrambles To Prop Up Business Bank Lending

U.K. regulations have been working to elevate business banking competition and expand access to capital for corporate and SMB borrowers, but the latest reports from the government suggest those efforts are falling short.

The Bank of England released new data late last week warning that business bank lending in the country hit its lowest rate in nearly two years in July.

Reports in The Irish News on Saturday (Aug. 31) said the central bank found a $5.1 billion decline in net lending to companies in the month driven by the $2.43 billion in repayments businesses made to their lenders. July saw a 3 percent growth rate in business bank lending, compared to 4.4 percent the month prior.

Large businesses saw a 4.2 percent decline in the growth rate of business lending, the largest of any category of business. Small and medium-sized businesses, meanwhile, remained unchanged with a 0.8 percent growth rate in lending for the month

According to Michael Biemann, founder and CEO of online lender Selina Finance, the plateau in small business lending growth could be a red flag signaling limited success of the government’s initiatives aimed at boosting SMB access to capital.

“SME borrowing rates remained static at 08 percent, which once again underlines the disconnect between the average U.K. business and the high street,” he told The Irish News. “These days, high street banks want businesses to jump through all kinds of hoops to secure finance, and so it’s no surprise the number of SMEs turning to alternative sources is on the increase.”

It’s unclear whether the Bank of England’s data reflects small businesses’ growing appetite for an alternative rather than traditional loans, however, or whether it represents declining appetite for capital — particularly as Brexit uncertainties amplify.

Government officials fear it could be the latter, and on Friday (Aug. 30), The Financial Times reported on the U.K.’s latest effort to bolster the small business lending market.

According to the publication, the U.K. government plans to hold an emergency meeting Thursday with senior bank officials in an effort to discuss how to ensure banks continue lending to small businesses in the scenario of a no-deal Brexit when the U.K. leaves the European Union on Oct. 31.

Expected to attend the meeting are Business Secretary Andrea Leadsom; Michael Gove, the minister in charge of no-deal Brexit preparations; and City Minister John Glen, while representatives from industry group U.K. Finance and top bank officials will also participate, according to reports, citing unnamed sources. The government will aim to obtain a commitment from banks to not cut small business lending following Brexit.

Sources also said the government will also discuss setting up dedicated funds for small business lending to avoid any disruption or a squeeze in supply.

Lenders, meanwhile, will look toward the government to provide greater support for businesses that may not qualify for bank loans under current risk criteria, reports noted, with some banks proposing an extension of the Enterprise Finance Guarantee, which enables businesses to obtain a government guarantee on loans that don’t meet banks’ collateral requirements.

Independently, banks have also introduced their own measures to safeguard small business lending operations in preparation for Brexit.

While U.K. Finance did not provide a comment to The Financial Times, it had previously stated that “the banking and finance industry has the capacity to support viable businesses whatever the outcome” of Brexit.

The meeting is only the latest effort by government officials to boost small business lending activity, which includes the ongoing allocation of about $1 billion in Royal Bank of Scotland funds to industry challengers, as well as measures to promote the introduction of new challenger banks and spur competition in the small business banking segment. However, if the Bank of England’s latest report is any reflection, small business lending remains stagnant as the U.K. heads toward Brexit.