Like a juggernaut driving through treacle, the UK economy is struggling to keep moving as banks seemingly refuse to lend to cash-strapped businesses. With banks and bankers vilified as the orchestrators of the ongoing economic downturn, it has fallen to the coalition government to do all it can to keep the cash flowing, and it has certainly tried a number of schemes to encourage the economy.
The latest one was unveiled by business secretary Vince Cable at the recent Lib Dem party conference: the creation of a business bank, fuelled by £1bn of public money and topped up by as much as £9bn of private sector investment. However, the devil is in the detail with these announcements, and unfortunately nothing will come to fruition for at least 18 months.
Cable said in a statement: “We need a new British bank with a clean balance sheet and an ability to expand lending rapidly to the manufacturers, exporters and high-growth firms that power our economy.”
Figures released by the Office for National Statistics revealed the economy contracted by less than expected in Q2, shrinking by 0.4 per cent in the April to June period – slightly less than the 0.7 per cent initially estimated.
But the channel seems to be residing in its own bubble, with insolvencies back to pre-recession levels in Q2, according to official stats from credit reference agency Graydon.
The industry is also backed by strongly financed distributors, leasing houses and vendor finance schemes.
However, any initiative that releases extra funds into the economy and in this case the channel, will be a welcome addition, said Computer 2000’s marketing director Andy Dow.
“While distribution extends credit to the channel, which enables our partners to grow and facilitates cashflow, there is still a major requirement for the channel to invest in new technologies, to skill up their workforce and build expertise ahead of the curve,” Dow said.
“Both the business bank and the R&D tax credit scheme will help the channel fund this investment. C2000 is engaged in helping channel partners to maximise these schemes to prepare themselves for future growth.”
Alex Tatham, sales director at distributor Westcoast, agreed that the idea was a good one in principle and said it would increase confidence along the chain. “I think this will have an impact on resellers. If you need to finance your business and be able to grow it, it is very important to have that finance available and draw down on money where you can. That helps insurers insure the company balance sheet, which in turn helps extend credit.
“Distribution has always been very important in the equation– most disties ensure their debts, effectively backing off some of the risk to insurers. Distributors may even go out on a limb. But this scheme will help insurers insure and disties give extended terms.”
Philip White, chief executive of leasing and finance specialist Syscap, said that provided the initiative becomes reality, it would be a welcome scheme.
“No one can doubt that the government knows the lack of liquidity available to small and medium-sized UK businesses is a critically important factor constraining investment and growth,” he said.
“The business bank announ¬cement adds another government initiative alongside Project Merlin and the green investment bank. While we hope it is more successful than the other initiatives, small UK companies that need funds to replace old technology and build growth could be forgiven for not holding their breath.”
Managing director of Ramsac, Robert May, said: “If it actually happens, it will be a good thing. The fundamental problem in the current finance sector is the lack of competition. We currently have 85 per cent of the SME lending market controlled by four banks. I read one suggestion recently that the bank may act as some kind of SME-debt securitisation body, buying in loans from existing banks, which would free their balance sheets and stimulate lending. Any which way, I think any move to support up to £10bn of business lending cannot help but be good for the economy.”
Richard Btesh, director of telecoms specialist Chess, said it was too early to comment on the initiative itself because details were so scarce, but he said his firm had capitalised on another government scheme called Funding for Lending.
“I think there is a genuine intent and understanding from the government that they need to encourage banks to lend money to businesses,” he said.
“It is easy to blame Labour for the financial crisis but it was really a crisis that came from the banking industry. As ever, the rule breakers are cleverer and quicker than the rule makers; greed rules in the City to a degree and we have to be careful about that.”
Btesh said that despite being 18 months away from reality, when taking the “lost decade” of the downturn into account, it is not that long to wait. “This all started in 2008 with Northern Rock and we are only four years into the lost decade,” he added. “Expectations need to be realistic and I am pretty encouraged by this announcement.”
Jeremy Davies, chief executive of Context said: “We all know that one of the serious issues the channel faces is finance, and distributors in particular are shouldering more and more of the load when it comes to providing the kind of financing their customers need. In fact, we have seen distribution revenue increase over the past year or so in the UK as business that would have been done vendor-direct is being channelled through disties to take advantage of the credit terms.
“So the business bank is a great idea, and yes – if it ever gets off the ground – is just what the channel needs. However, it is hard not to be sceptical when you see such sketchy details and no firm plan or precise remit other than it aims to do a job the banks are supposed to be doing but have not done yet. And in the intervening 18 months before it starts, expect disties to take even more of the load.”
Bank of England: Business lending has fallen
A recent report by the Bank of England revealed bank lending to businesses in the UK fell by about ￡3bn in the three months to May.
The report, entitled Trends in Lending, amalgamated figures from major lenders such as Banco Santander, Barclays, HSBC, Lloyds, Nationwide and Royal Bank of Scotland, which account for 70 per cent of the money lent to businesses, 45 per cent of the money lent to consumers and 75 per cent of all mortgage lending.
As revealed by the report, the annual rate of growth in the stock of lending to businesses was negative in the three months ended 31 May. SMBs were particularly hard hit. In total, the amount of all loans outstanding from the above-mentioned banks to UK businesses was estimated to be about £450bn by the end of May 2012.
Of this total, 35 per cent was SMB lending. When compared with the same period in 2011, this amounts to a five per cent decrease in the amount of money lent to businesses. Phil McCabe, senior policy adviser at the Forum of Private Business (FPB), said something needed to be done. “There is no doubt action is needed – the banks are not lending enough and we know this,” he said.
“But we really need a dual focus. That is, getting more transparency in compound bank lending and improving ethics in the way banks treat their small business customers, backed by more lending through alternative sources of finance such as peer-to-peer platforms.”
He added that FPB members would not be overjoyed with the business bank idea: “When we surveyed our members in July, the majority wanted any new government stimulae to come through non-bank channels, so SMBs may well greet [the business bank announcement] rather coolly.”
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