Research shows access to finance is 'worsening'

27 July 2010

This revelation comes amid reports that the government is getting tough with banks for failing to provide affordable lending to small companies.

Business secretary Vince Cable has hit out at ‘misleading’ banks’ claims that, despite demand for lending being low, approval rates are high.

In a green paper launched yesterday entitled ‘Financing a Private Sector Recovery’, banks could face penalties for failing to boost lending to small businesses.

According to the forum’s latest Economy Watch survey, there is ‘significant latent demand’ that is not being met by banks, contrary to claims made by several lenders.

The forum’s July survey shows that loan facilities for the 358 members on the Economy Watch member panel have declined by £66,000 during the past month, while overdrafts were down by £34,500.

This deterioration comes despite an anticipated requirement for external finance of £1,057,000 per month, recorded in January 2010.

In all, one per cent of respondents said that access to finance has improved, compared with three per cent in May, and 15 per cent said it has worsened – almost four times the number in May when four per cent reported a decline. In addition, 67 per cent have seen no changes in their ability to access to finance.

The majority of the cuts were to overdrafts, with some businesses reporting reductions of more than 50 per cent and cancellations to their overdraft facilities. However, the biggest individual reductions came in the form of rejected loan applications and the withdrawal of credit.

‘Contrary to what some of the banks are saying, some firms are still not able to access the finance they need and both business growth and economic recovery is under threat as a result,’ said Matt Goodman, the forum’s head of policy. ‘According to our members, demand is certainly there, but lenders are not providing the funding or the levels of service that they should be. They are telling us that creeping costs and charges are making finance that is available less accessible.’

Goodman added: ‘Our research shows that the government’s green paper is timely in addressing lending as part of its move for a private-sector-led recovery. As with exploring alternatives to traditional lending, a “carrot and stick” approach to encouraging banks to lend is sensible, providing the carrot offers a genuine incentive and the stick is a real deterrent.’