New Bank of England figures show £3bn slide in lending to small businesses

Bank of England offers banks incentives, but gloomy outlook keeps demand flat

British companies are labouring under the biggest slump in business lending since last December as well as rising borrowing costs, alarming Bank of England data revealed on Friday.

The £3bn fall in loans and overdrafts extended to UK companies during April raises more doubts over the Bank’s Funding for Lending Scheme (FLS), which is struggling to kick-start business credit markets despite bringing down the costs of mortgages.

The latest decline was also almost three times the £1.3bn average fall in business loans seen over the past six months. Average interest rates paid by firms on new loans also rose to 2.86 per cent in April, the dearest since last October.

Business leaders hit out at a £700m fall in loans and overdrafts to smaller companies during the month, far steeper than March’s £100m decline. Steve Warwick, London regional chairman of the Federation of Small Businesses, warned: “We have long said that there needs to be more competition and sources of finance for small firms because relying on the big five is clearly not working. To get the recovery on a firmer footing, businesses need to access finance and greater competition in the banking sector should help this.”

The Treasury is attempting to improve the impact of the FLS by offering much bigger incentives for banks to lend to small businesses. But Bank Governor Sir Mervyn King has said the tweaks are “not a game-changer” as caution over a tough economic outlook tempers demand for loans.

Capital Economics UK economist, Samuel Tombs, said: “It is too early for the lending figures to reflect any boost from the recent extension of the FLS. But as things stand, the continued weakness of bank lending remains a major reason why we expect the economic recovery to struggle to gather pace in the foreseeable future.”

Despite an upturn in consumer lending and signs of rising confidence, mortgage lending came to a virtual standstill last month at 53,710, although the cost of loans is falling. Average rates on new home loans fell to 3.31 per cent, a decrease of 0.12 per cent on the month, contrasting with more expensive business loans.

Barclays chief economist, Simon Hayes, said the data underlined a widening gulf in conditions for businesses seeking credit and would-be homeowners looking for a mortgage.

He said: “The mortgage market is likely to benefit from improving optimism on the part of households, which is already showing up in more upbeat housing market indicators, and a willingness on the part of lenders to pass on the benefits of the FLS to mortgage borrowers.

“The new government support schemes have also added to the positive tone around housing. By contrast, businesses have seen loan rates rise even as bank funding costs have fallen.”