UK bank lending failures leading to new measures being implemented

The British government has been launching an array of initiatives that, if successful, will boost business lending. Most of these programs, including a recent investment of some £30 million to alternative short term lenders, have one main goal in mind: breathing life into the small and medium-sized enterprise (SME) sector.

"A lack of access to finance is still choking off too many small businesses, preventing them from growing, taking on new staff or investing in new equipment," said Business Secretary Vince Cable.

February's lending numbers put another nail in the Funding for Lending Scheme's coffin. A recent British Bankers Association study revealed that non-financial business borrowing plummeted £1.8 billion compared to February 2012, according to the International Business Times.

Even the mortgage sector, the lone bright spot of the FLS thus far, reported a 6 percent year-over-year decrease in approvals.

Bank lending dried up

So what has led to the SME's current economic state? While a number of factors are involved, banks' hesitancy to lend to smaller firms has certainly ranked near the top.

According to recent statistics by the Bank of England's Financial Policy Committee (FPC), banks in the United Kingdom fell approximately £25 billion short of lending demands in 2012. Even more concerning, according to Matthew Fell, director of competitive markets at the CBI, is that there doesn't appear to be a plausible way for banks to plug this gap in 2013.

"While the FPC wants banks to meet additional capital levels in a way that will not restrict lending, it is difficult to see how this can be achieved in practice," Fell said, according to The Telegraph.

Alternative lenders are best bet for solution
These and other factors have, in many ways, paved the way for the emergence of alternative short term lenders. The SME sector continues to struggle, and with banks so reluctant to help them out, small business owners have had to turn to other sources of income.

Many of them have found alternative lenders to be optimal because of their use of Payment Reporting Builds Credit (PRBC) scoring methods. PRBC looks at a number of factors, such as a company's ability to pay utility or phone bills on time, to determine whether or not to lend.

Not only will this solve an immediate need for short term lenders, but in the long run, Business Secretary Vince Cable thinks it will "create a more diverse and balanced market for business lending."