The state isn’t lending to small firms either
Instead of criticising the banks for not lending to business, the government should look at its own Enterprise Finance Guarantee. Lending under the scheme has fallen by 60 per cent since last year. Maybe suitable firms just aren’t that keen to borrow?
The EFG is operated by the banks but the state offers the guarantee, paying three-quarters of the losses if the loan turns sour. So banks have every reason to put marginal loans into that scheme rather than risk their own money, but even so, the take up is not there.
In the first quarter of 2009, after the old Small Firms Loan Guarantee was revamped and renamed as Enterprise Finance Guarantee, some £254m of lending was provided. In the latest three months just £149m was lent. Having budgeted for £1.3bn of lending in the 15 months of March 2010 and £500m in the following year, it is possible there will be money left at the end that is not taken up.
The guarantee is available to firms with turnover below £25m seeking to borrow between £1,000 and £1m for three to ten years. That’s better than the sold Small Firms scheme, which had a £250,000 ceiling. And for the privilege of the guarantee, the borrower pays the government 2 per cent of the outstanding debt.
It is intended for borrowers who lack the collateral lenders would normally demand and banks ought to be keen to direct marginal customers into this scheme. True, the bureaucracy probably makes a £1,000 loan inefficient and the length of the process makes the scheme unsuitable for those with pressing cashflow problems.
But the lack of lending seems to be down to the same reasons that banks are unable to lend money without such guarantees – the failure of borrowers to provide a viable business plan and the lack of demand to borrow at all.
Small and medium-sized businesses are polarising into those that have adjusted their finances to the current situation so that they can repay debt, and those with chronic negative cashflow who need to keep borrowing just to pay their operating losses.
It may not be good for the country that the former group is cutting back on capital expenditure and other items of discretionary spending to generate the funds for reducing their debt, but it puts those firms on a sound financial footing for the immediate future. As for firms running at losses, borrowing more does nothing to help other than to buy time, so there should be no surprise that banks reject their pleas – with or without state guarantees.
