Banks cannot be forced to finance small firms
If the political parties are to argue, then outbidding each other to help small business is more productive than many of their clashes. However, words have to be translated into cash.
Small business has become the autumn battleground of the Tory and Labour leaders, egged on by the Daily Mail which has adopted SMEs as its worthy cause. But for all the Conservatives call for a Vat holiday or a cut in National Insurance, it is only government that can deliver, and for the moment that means Labour.
The government’s small-business package includes a free “health check”, a hint (but nothing more) of Inland Revenue flexibility, and a re-allocation of training budgets. But for small firms facing falling sales and margins that are turning negative, training and investment are luxuries that are already on ice: their short-term objective is survival.
The important parts of the package are thus the order to state agencies to pay bills within 10 days – something the government can deliver – and the instruction to the banks to lend at 2007 levels – something the state cannot.
The cashflow benefits of prompt payment are important for small firms but refinancing old loans and access to increased working capital even more so. Yet banks were foolish to lend on the lax terms they offered last year and they would be even more foolish to repeat that lending in an economic climate that has deteriorated significantly.
As the main shareholder in three of the big banks, the government should be not be encouraging imprudent lending. It is quite legitimate that banks now refuse loans they would have provided – or did provide - last year, or that they demand higher interest rates or greater collateral.
In practice banks may advertise credit availability to keep the government happy, but in practice it will be on terms that companies will decline. Short of the state offering guarantees or subsidies, the banks couldn’t and shouldn’t do anything else.
It is welcome that ministers appreciate that small firms are a key driver of the economy, but many operate on models that are unviable in a recession. Banks cannot be forced to make bad loans.
