Lending to small businesses fell by £200 million in the final three months of last year, the Bank of England has found, providing more evidence of the failure of a government scheme designed to provide companies with more credit.
Net lending to small and medium-sized businesses from high street banks that participate in the Funding for Lending Scheme stood at £0.6 billion in the last quarter of 2015, down from £0.8 billion in the previous three months.
The Bank of England said that it was growing “gradually” but the latest data will do little to convince those who argue FLS has not achieved its aims. At its launch four years ago George Osborne promised “welcome support” for businesses that wanted to grow.
The scheme, designed by the Treasury and the Bank to encourage banks by providing them with cheap wholesale finance, originally focused on households.
In 2014, it was altered to concentrate on corporate lending after a disproportionate amount of loans went to households, but it has failed to make a significant difference to credit conditions. Banks blame a lack of demand.
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Separate figures from the British Bankers’ Association show that net lending to small and medium-sized companies stood at £2.1 billion last year, the first annual increase since the BBA started recording this data in 2011. Much of this was the result of a slowdown in companies’ repayments.
There were fewer applications for loans and overdrafts last year than in 2014, with demand down 13 per cent and requests for overdrafts dropping by 9 per cent. Total loan approvals fell by 12 per cent.
The extent to which small businesses are lenders to banks, rather than the other way around, was also highlighted. Small company deposits with lenders now exceed their borrowing by more than £60 billion, an increase of 7 per cent compared with last year, the BBA found.
Mike Conroy, managing director of business finance at the BBA, said cash piles at small businesses meant that the need for bank finance had decreased.
He added that alternatives to traditional banking products, including equipment leasing and invoice finance, were playing an “increasing role”.
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For those companies that applied for bank finance, Mr Conroy noted that the odds of a successful application were strong.
“More than eight in every ten applications [for loans and overdrafts] are approved, so the fact that more than £6 billion of new lending was approved quarterly last year and that there was positive net lending across 2015 are encouraging signs,” he said.
David Dooks, the BBA statistics director, added that there was demand for finance among medium-sized and growing companies that was being well served by mainstream lenders.
Larger companies were more likely to be using external finance now than they were at the same time last year despite overall demand remaining flat, according to a study by BDRC Continental.
Sacha Bright, who runs Business Agent, an alternative finance referral platform, said that some of the weakness in demand for bank finance was down to the gradual increase in competition from non-bank providers.
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“More businesses are turning to peer-to-peer lending and crowdfunding. The UK alternative finance sector in 2015 covered £3.2 billion in loans and investments, an 84 per cent increase from 2014,” he said. “Small businesses now have somewhere else to turn and we expect the growth to continue.”