Newspaper article The Evening Standard (London, England)

Let's Make Sure Demand Is There to Get Most out of Credit Boost

Newspaper article The Evening Standard (London, England)

Let's Make Sure Demand Is There to Get Most out of Credit Boost

Article excerpt

Byline: Russell Lynch economic analysis

AS the old adage goes, you can lead a horse to water but you can't make it drink. That's the problem currently faced by ministers despite recent tweaks to the Funding for Lending Scheme to get credit taps flowing for smaller firms.

Small businesses -- those with revenues of less than [pounds sterling]25 million -- account for less than a quarter of total UK business turnover. But their political clout outweighs their economic significance: they also make up the vast majority of firms and more than half of total jobs -- and they shout loudly, making it an area of huge sensitivity.

Politicians wince with every frustrated small business owner who takes to the airwaves to rail against a lack of loans from a banking industry bailed out with tens of billions from the taxpayer.

Hence the huge incentives banks now have to open the coffers, with FLS participants being able to draw down [pounds sterling]10 in cheap funding for every [pounds sterling]1 loaned to smaller firms until the end of the year. Non-bank lenders such as invoice financing houses, which supply billions to SMEs, will be able to tap the scheme, giving another shot in the arm for business credit when the mortgage market has enjoyed most of the benefit of the FLS so far.

But how thirsty are these firms for the cash? According to Bank of England figures this week, the effective cost of borrowing on new loans to the private sector fell to just 2.57% in March, the lowest for more than a year. But including overdraft facilities, loans from major financial institutions to SMEs dropped by [pounds sterling]100 million over the month. Despite slim signs of improvement, lending is still shrinking at an annual pace of 3.5%. In the past year, the amount of loans outstanding to SMEs has shrunk by [pounds sterling]12 billion.

Of course, some firms may be too afraid to approach their banks for credit for fear of disturbing the beast and jeopardising their existing arrangements. But the nagging problem for George Osborne and his Cabinet colleague Vince Cable is that throwing money at small businesses might not produce the required kick to the economy, when there is plenty of evidence to suggest firms are more concerned over the state of the recovery. …

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