Wednesday 6th Nov 2019
UK SMEs rely heavily on borrowing from the country’s major banks, but research conducted by the Bank of England into the financial sector suggests that the more established banks are becoming reluctant to lend to SMEs as we move into late-2019 and 2020 - particularly when it comes to medium sized businesses.
Bad debt build-up
Naturally, there’s a combination of factors at play here. Perhaps the leading issue is that banks have seen a significant increase in the number of defaulted accounts on their books. Businesses are, for varying reasons, struggling to repay the debt that they have accumulated, and banks are having to cut back on lending as a result, as well as potentially maintain stricter lending criteria. It’s likely that there’s two driving issues; that some debt was always bad and should not have been given out by the lending houses, but also that the economy has struggled in certain areas, meaning businesses don’t have the means to pay their debts as they may have planned.
Economic uncertainty
It’s worth noting that the research primarily asked banks if they expected to lend over the next quarter, which means that the survey is also heavily influenced by demand for lending products, not just a willingness to lend. The uncertainties surrounding Brexit are undoubtedly one of the reasons that businesses are reluctant to take on additional debt. At the time of publication, the way in which the UK will leave the EU has not been decided, and beyond this, there’s still very little certainty about how the UK’s future relationship with the bloc will look. Economic data has not been strong in recent months either.
What alternatives are there?
While major banks may be cutting down on their willingness to offer traditional products such as loans, overdrafts and credit cards, there are still alternatives available to SMEs that need funding. If the issue is cash flow for example, then there are options such as invoice finance, which is a product available from other finance companies such as Hitachi. This type of borrowing is done against invoices, which means that businesses can realise most of the value of their invoices before the customer actually pays. If businesses are unable to get the finance they need from their usual bank, they may need to look elsewhere for funding.