The banks are starting to lend to businesses again – but only at a penalty rate

Banks are now increasing their lending to UK businesses – in line with their commitments to government – but are only doing so at an increasing cost to firms, according to a survey from one of the nation's leading business organisations.

The Engineering Employers Federation says today that its latest credit conditions survey "provides some tentative signs that the situation will have improved in the second quarter", but that "rising costs could remain a challenge".

The news follows the recent disclosure that the banks have missed their first targets for lending to forms under the "Project Merlin" deal with the Government. The latest evidence suggests that they are more likely to hit their goals in the second quarter of this year, but will do so at some penalty to hard-pressed companies, especially in manufacturing.

According to the survey of almost 500 companies, some 18 months into the recovery, finance availability appears to be starting to ease for small companies. As many small companies reported an increase in the availability of new lines of borrowing over the past two months as reported a decrease, a net balance of nil. This compares with a balance of minus 11 per cent in the previous quarter. There was a similar improvement in the balances amongt mid-size companies.

For existing credit facilities the balance of companies reporting decreased availability dropped from 11 per cent to 7 per cent among manufacturers.

But while fewer companies are reporting rising interest rates on existing facilities, a net balance of 22 per cent of companies reported an increase in the overall cost of credit in the past two months, little changed from the previous quarter, indicating a rise in fees and costs for new credit lines.

Thus, the EEF says that on new lines of borrowing a balance of 28 per cent of its companies reported an increase in the overall cost.

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