UK small businesses reduce appetite for borrowing

POSTED: 17th June 2013
IN: Business news

Despite attempts such as Project Merlin and the FLS to get business finance out there to firms that need it, official data appears to show that small businesses are increasingly opting to avoid borrowing money to invest in their business.

undefinedBank of England

The latest Credit Conditions survey covering the first quarter of 2013 shows that there was a reduction in lending to small and medium-sized businesses (SME’s). The report said there was a significant fall in demand for business lending from small businesses, though this was expected to increase in the second quarter.

The report said that economic confidence was still “fragile” and this was impacting on demand for borrowing. Lower capital investment was cited as the biggest reason for a fall in demand for SME borrowing.

Funding for Lending Scheme

The scheme has had some success in increasing the number and reducing the rates of mortgages for borrowers, including first-time buyers.

However, the scheme was also aimed at helping to increase the flow of credit to (SME’s) so that they can invest in their businesses and encourage the overall UK economy to grow.

The latest statistics released by the Bank of England show that after a £2.4 billion fall in net lending by banks in the final quarter of 2012, lending fell again by £0.3 billion in the first three months of 2013.

Howard Archer, Chief UK Economist at IHS Global said the decline was “primarily due to falling net lending to businesses.”

This led to the Treasury announcing that it will extend the FLS with more of a focus on lending to businesses

Reasons for the fall in lending

Economists believe that part of the reason that businesses want to borrow less is because many forms are reducing their exposure to commercial real estate which makes up a significant proportion of corporate lending.

However, others believe that businesses, like households, are trying to pay down debt rather than take on new debt.

Alternative borrowing options

Credit unions and peer-to-peer lending have increased in popularity since the banking crisis as consumers look for alternatives. However, they still only account for a small proportion of the overall business lending market.

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