One of the many reasons to be thankful for our return to economic growth, assuming it is sustained, is that we may finally get some resolution in the bitter argument about lending to small companies. It should at last be possible to reach an informed judgement about whether or not the banks really are holding back growing businesses by denying them access to credit.
For some years now, the banking industry has been embarrassed by statistics revealing it is consistently lending less money to small and medium-sized enterprises, despite the public exhortations of policymakers to advance more credit – not to mention practical assistance from schemes such as Funding for Lending. Its response has been to argue the problem lies with demand for credit – that SMEs do not want to increase their borrowings.
There is some independent support for this. For example, a report published by the think tank Demos last month suggested that just one in 25 SMEs had applied for credit and been refused over the previous year. Demos said around 40 per cent of small companies had not borrowed at all over the previous five years and had no intention of doing so in the foreseeable future.
The explanation for that lack of demand is perfectly straightforward. In the tough trading environment most businesses have faced in the years since the financial crisis there has been an understandable reluctance to do much more than batten down the hatches and wait for things to improve.
Now, however, that we are reaching that moment, there is reason to think demand for credit will once again begin to increase. Indeed, the evidence suggests this is already happening. The Credit Conditions Survey published by the Bank of England last week suggests there was a notable increase in demand for credit from SMEs during the third quarter of the year, following a similar uplift during the second quarter.
We are, in other words, now approaching the time when the banks will no longer be able to offer lack of demand for credit as a reasonable explanation if the amount they lend to SMEs continues to fall. It may not do, of course – the Bank of England also reports that the supply of credit improved during the third quarter, particularly to the smallest businesses, albeit only slightly. As demand increases, the banks may be ready to meet it.
There are significant barriers preventing them from doing so, however. The ongoing focus on capital and liquidity issues is a constraining factor for SME lending, which typically attracts higher risk ratings from regulators than other types of credit. And while the entrance of challenger banks to the market is welcome, these providers are not yet able to provide the additional funding required to make up for the diminished capacity of the established players. Meanwhile, other new launches in the SME lending sector – of Nationwide Building Society, for example – have been delayed.
We should, in any case, be careful about what we wish for. The truth is that many banks lent too much to SMEs in the run-up to the financial crisis. Bank debt is not always an appropriate way to fund the growth of a business – for the lender or the business itself – but when such credit was available, the temptation was for owners to take it rather than dilute their equity with backing from providers of growth capital. A return to that market environment would be unwelcome and unhealthy.
Nevertheless, the early stages of this recovery – if that is what we have – do represent a challenge to the banking sector: now is the moment for them to put their money where their mouths are on lending to SMEs. As trading conditions improve it will become more difficult to defend figures that show further declines in total lending.
Taxman’s blessing boosts GXG’s appeal as place to list
GXG Markets, the stock exchange operator, is crowing after winning “recognised stock exchange status” for its pan-European market from HM Revenue & Customs.
The certification means shares listed on the market will now be permissible holdings for investors’ tax-free individual savings accounts (Isas) and self-invested personal pensions.
GXG hopes that the concession will give trading on the market a similar boost to the uplift witnessed on AIM since it won the same recognition earlier this year.
However, the deal applies to only 30 or so of GXG’s listed companies, with the smallest businesses on the bottom tier of its market excluded.
Nevertheless, Henrik Kaspersen, GXG’s managing director, said the tax move would give small businesses another reason to consider listing on his market, rather than on one of its several European competitors.
“It demonstrates GXG’s commitment to helping small and medium-sized enterprises, and we will continue to look for better ways to serve the European small-cap community,” Mr Kaspersen explained.
Here’s a tip: remember to invoice
Small businesses understandably get very cross about customers who take forever to pay their bills, but how many can be confident they’ve issued invoices to everybody who owes them money?
A survey of 450 small and medium-sized enterprises (SMEs) from business software provider Exact suggests many forget to bill for work they have done.
One in five SMEs told Exact they had forgotten to invoice for goods or services at least once. And while the bills were typically for relatively small sums – most often less than £10,000 – the cumulative cost to businesses of these forgotten invoices could be as much as £3.7bn.
“SMEs that are eager to grow are not doing themselves any favours, particularly with so many of them expressing concern over their cashflow,” said Hartmut Wagner, managing director of Exact.
Small Business Man of the Week: Tom Elgar, Founder, Passle
We launched Passle because while 90 per cent of companies say they’re doing content marketing, only 13 per cent are actually updating their blogs or posting to social networks on a regular basis. People recognise the potential for content marketing, but they don’t have the time to do it properly.
We’ve tried to build a tool that will solve that problem. It allows you to cut and paste relevant articles, pictures and videos which you see online onto your own postings, and to add your own comments. That’s a very quick way to provide short pieces of interesting content to your audience – then when you’ve got the time or the inclination to sit down and write something longer or more nuanced, you can do that too. The idea is to help small businesses create content that has vibrancy and immediacy.
Our business model will evolve over time – we’ve started off by offering the service free of charge to small businesses, with a small amount of our branding on their blogs and posts. Larger businesses can pay not to carry that branding. We also plan to sell this as a white-label service to agencies that are trying to do something similar on behalf of businesses but not really succeeding.