April 2012

Bank Lending Set to Fall as Loan Write-Offs Rise

More ominous signs in the news today signaling that securing a bank loan, either as an individual or as a business, is set to become even tougher!

This is due to this year having the highest level of write-offs on corporate loans since the 1990s. A survey by the Ernst & Young Item Club predicts that the amount leant by UK banks will contract by 6.8% in 2012 to £419bn – a long way off the £575bn peak in 2008. This huge difference is due to an overwhelming 1.9% of business loans being written-off; a proportion not seen since the recession of the mid 1990s.

Furthermore, research showed that insolvencies were likely to rise most sharply in the North-East and Wales, while a decrease in lending to manufacturers will no doubt compound the issues and hence worsen the outlook for the region.

The inevitable decrease in mortgage lending will also be felt worst in the North. The survey revealed that “any growth will be spread very unequally across the country” and that “The north-south divide that we are forecasting in economic conditions is also likely to be reflected in housing market activity.”

So what significance will this have on the UK Business Funding environment? Clearly banks are no longer the ‘way forward.’ There are numerous other ways for a business to raise finance (without the use of a bank) – maybe we will see a shift towards these less conventional methods of funding.

Non-bank lending on rise for UK SMEs

Recent research from the Federation of Small Businesses has identified stark contrasts between the business funding environment for SMEs in the US and the UK.

Small businesses in the US have been spoiled for choice when it comes to raising finance; with 15,000 financial institutions competing to lend to companies. Half of these are banks, while the other half are credit unions. Whereas in the UK, 5 dominant lenders account for more than 90% of loans to SMEs – this is due to alternative finance providers having a poor profile in the market.

However, as banks have become much more risk averse and have tightened up their lending criteria accordingly, there has been a new push towards alternative finance arrangements such as Invoice Factoring, Invoice Discounting, Asset Leasing and ‘Peer to Peer Lending.’

There has been immense recent interest in online ‘peer to peer lending’ – a relatively new concept that allows individuals from any background to lend to SMEs and other individuals; examples include Funding Circle and Zopa. £100M – £200M changes hands on these online platforms per year – and this number is growing rapidly.

The UK business funding environment needs significant reform if we are to follow the model adopted in the US, but surely increased awareness and availability of these alternative lenders are steps in the right direction.