Lending to SMEs increases but problems remain

Lending to non-financial SMEs grew by £0.7 billion in February, according to figures released by the Bank of England. This is a sharp rise from the average monthly increase of £0.2 billion seen over the previous six months.

This follows a release from the British Bankers Association (BBA) which revealed that £6 billion of new lending was approved quarterly last year, with positive net lending across 2015. It said that finance applications in the form of loans and business overdrafts were approved for eight in 10 smaller businesses and nine in 10 medium-sized businesses.

The BBA also reported a slowdown in applications for funding from SMEs across 2015. The number of businesses looking for loans fell by 13% compared to 2014 and those applying for overdrafts fell by 9%.

One factor behind this slowdown could be attributed to the fact that SME cash deposits had also grown. The level of cash held by SMEs in current and deposit accounts totalled £164 billion at the end of last year. This represented an annual growth of 7% and, according to Mike Conroy, managing director of business finance at the BBA, this could have helped reduce the need for external financing.

The growth of alternative funding options could be another factor behind the slowdown of applications for traditional bank loans and overdrafts. These options also provide much needed support for those firms that are struggling to manage their finances effectively.

According to GLI Finance executive Louise Beaumont, data from Funding Options shows that SMEs have had £5.7m withdrawn a day in small business overdrafts, cutting the credit available to them by £8.4bn over the past four years. Many small businesses, she claims, could be resistant to applying for finance via traditional routes because they are concerned about having their existing overdraft facilities revised or removed.

She also said that a recent report from the British Chambers of Commerce showed that SMEs have very little understanding of the alternative finance options available to them.

From 1 April, a credit data sharing scheme went live, which requires banks and credit agencies to share credit information with other providers. This is designed to make it easier for new banks and alternative finance providers to check the credit-worthiness of potential business customers.

By Phil Smith

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