Member Article

The Mexican standoff

The latest news from the Bank of England on the contraction of lending is disappointing. Almost £100bn in lending has disappeared since the 2008 bailout and with it a similar amount of liquidity from the economy. £3.2bn has disappeared in March alone.

I am concerned by this figure which comes fast on the heels of the news of the double-dip recession (albeit that there are some signs that this data might be flawed - it conflicts with PMI data.)

Lord Oakeshott, the Lib Dem treasury spokesman has been a vociferous critic of the Banks and Project Merlin in particular. He described it is a ‘con’ which I think is a little emotive. Nevertheless I can see the point he is trying to make. Unless we support our businesses and give them access to credit we will find it almost
impossible to climb out of recession.

It has also been pointed out that the contraction in credit has also driven up margins, and worse still the margins on small loans of less than £1m have widened by more twice the rate of those of £20m or more. This tells us that the SME sector has suffered disproportionately.

It is important to point out that throughout the last three-and-a-half years the banks have had the immensely difficult task of having to deal with increased capital requirements, deteriorating loan books, reduced inter-bank lending, and sovereign debt worries. They are not deliberately withholding funding, they are just being far more selective about the customers to whom they lend and will continue to be so until the economy improves.

This is a Mexican stand off. Debt is hard to obtain, especially for SME’s and so the economy isn’t improving and because the economy isn’t improving (and all the other issues they have to contend with) banks are continuing to exercise caution.

There is very little any of us can do to change this situation but there are things you can do to improve your chances of getting bank support for that business critical project. Ensure that you produce a strong business case. Make sure that you answer the concerns which your lender has – speak to your bank manager and ask him to give you an outline of how his colleagues in credit are likely to view the risk. You can then think about the mitigants and how to write your pitch.

If you are an SME in this position or you know one who is, I would like to hear from you.

This was posted in Bdaily's Members' News section by Phil Dibbs .