Are small businesses benefiting from increased credit availability?

8 Dec 2011

The ability of small businesses to borrow money is key to economic growth, particularly in manufacturing and engineering. Government plans are in place to increase lending to businesses, but it is being questioned whether greater credit availability is actually allowing companies to borrow more.

In early 2011 David Cameron announced Project Merlin, an agreement between the Government and the UK’s four biggest banks that committed them to make more credit available in 2011, particularly to small and medium enterprises (SMEs).

This first target seems to have been reached, with David Cameron using his speech to the Confederation of British Industry in November to announce that ‘£157bn has been lent in the first three quarters of this year, 11% more than expected.’

However, whether this money has reached SMEs and benefitted the UK economy is a different matter. The Prime Minister added in his speech that ‘lending to small and medium businesses is up 10% on last year’ but there is debate about whether credit is being lent at a rate small businesses can afford.

The figures used by the Prime Minister represent gross lending facility, rather than actual gross lending, essentially the money banks have made available, not the amount they have actually lent. For example the figures include overdraft offers made to businesses, whether they have been used fully or not.

The numbers also hide the cost of borrowing according to Lee Hopley, chief economist at EFF, the Manufacturers’ Organisation. In a statement to the Treasury Select Committee he said that Project Merlin had ‘only tackled the availability of credit, and not dealt with the prohibitively high price of this credit for businesses.’

Andrew Cave of the Federation of Small Businesses told the committee that the increased availability of credit has not benefitted SMEs. ‘A significant number of businesses turned away for finance felt that they were now at a competitive disadvantage’ he said, adding that ‘These businesses were often successful and were actively looking to grow.’

So while the Government’s efforts to increase lending to small businesses seem to have made more credit available, organisations representing SMEs feel that lending conditions are still unfavourable. The Manufacturers’ Organisation said, ‘a market-driven solution for the availability of credit is required as quickly as possible, and alternatives to bank-lending need to be explored.’

Further information

The Manufacturers' Organisation

Confederation of British Industry

Federation of Small Businesses

Treasury Select Committee