As small businesses struggle to obtain funds to continue in business the UK Government continue to announce initiatives which are more spin than substance.

The motive for the Treasury making available £400bn of taxpayer support last month was to prevent the collapse of the banking system. Quite right too, but anyone who thinks it was supposed to kick-start lending by banks is deluding themselves. Mind you, they are not to blame because that is exactly the impression that government ministers created.

In announcing the availability of the funds, Chancellor Alistair Darling stipulated that over the next three years recipient banks “should maintain the availability and active marketing of competitively priced lending to homeowners and to small businesses at 2007 levels.”

This sounded very positive and it was politically necessary as taxpayers were outraged that banks should be propped up with their money but with no clear idea of what taxpayers would get back in return.

But political necessity (spin) aside, what does “the availability and active marketing of competitively priced lending to homeowners and to small businesses at 2007 levels” actually mean?

Well it certainly doesn’t mean lending at the same margin over the Bank of England’s Base Rate, because for both mortgages and small-business loans that margin has soared. The argument of the lenders is that they need to reflect the increased risks of lending when the economy is shrinking and when many more businesses and individuals are financially stretched. So, their logic is that times are tough for homeowners and businesses so they need to charge more – which of course makes things worse and will probably result in more defaults than would otherwise have happened.

The Treasury can shout all it wants to the recipients of capital from taxpayers that they must provide more loans to homeowners, but these recipients simply don’t have the resources to fill the gap. The fact is that well over 50% of lending capacity in the mortgage market has been taken out by the collapse of Northern Rock and Bradford & Bingley, and the problems at HBOS, not to mention the freeze on new lending by small building societies.

Whether we like it or not, yet more taxpayers’ money is going to need to be thrown at reviving the mortgage market. So look out for an announcement in next Monday’s Pre Budget Report.

Then of course Mr Darling is going to have to see what he can do for businesses because over the last 4 months credit for business has become harder to obtain and more expensive. This seems likely to involve an extension of the “Loans Guarantee Scheme” which currently provides public-sector guarantees for 75% of some types of small-business loans.

But this scheme is tiny and represents just 6% of all small-business lending of just under £6bn. So it would have to be massively expanded to yield serious benefits. Also anyone who has tried to access the scheme in its 25 year history will know that it is complex, time consuming and costly (you really need professional advisors) to access.

No, what small businesses need is some assurance that they can still get overdrafts and small loans needed to finance their working capital and asset purchases easily and at low interest rates. I know of one small businessman who had an overdraft facility of £10,000 at 8.75%. His bank recently increased that and he now uses his own credit card to finance his company because although the rate is a little higher than the new bank overdraft rate there are no “facility fees” to pay. But he is still paying almost twice what he was three months ago! The loan guarantee scheme won’t help him.

Come on Mr Darling, dump the spin – let’s have some real help for businesses.

No comments yet.

Leave a Reply