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U.K. businesses still struggling to secure loans from banks

Feb 26, 2013 Sean Albert

Bank and credit union lending in the United Kingdom has been at a standstill in recent years, and small and medium-sized enterprises (SMEs) are struggling as a result. This has prompted Vince Cable, U.K. business secretary, to request that the Bank of England change its Funding for Lending Scheme.

"SME lending still isn't happening the way it should," Cable said at the Warwick Economics Summit in Coventry, England, according to Bloomberg. "One of the questions for the immediate future is how the FLS could be adapted to deal with the needs of SMEs. I have written to the deputy governor to seek a meeting seeing how we can address that."

Cable suggested that Bank of England has adopted a strict short term lending policy that requires "rock solid gilts" for businesses to secure loans. He advocated that lenders will need to loosen up on these restrictions in order to boost the SME sector - a sentiment shared by Mark Carney, who will take over as Bank of Canada government in July.

"The main change people are looking for is a genuinely open mind and a willingness to look at how monetary policy can continue to support the real economy," Carney told the news source.

Alternative lending methods can produce growth
Cable suggested that there needs to be a balance between responsible short term lending and enough funding that will enable SMEs to grow. With banks and credit unions continuing to refuse most loan applications to smaller companies, business owners are increasingly looking to alternative short term lenders - many of which use Payment Reporting Builds Credit (PRBC) scoring methods - to secure finances.

In a recent blog post for Real Business, Adam Baldwin, a U.K. entrepreneur, discussed several loan initiatives that could help spur the country's small and medium-sized enterprise sector into action, including:

- Startup loans: Startup growth is an extremely important component for the U.K. economy to experience success, but with SME lending down across the board, entrepreneurs are finding it nearly impossible to secure funding for new companies. As a result, Baldwin proposed a "student loan model style" for startups, with the businesses beginning repayment at income contingency rates during year three.

- Seed funding: These initiatives would provide significant tax relief for companies in the early stages of development, which Baldwin suggested could lead to substantial growth.

- Liquidity for startups: Private sector alternative lending options have filled the gap left by financial institutions, and Baldwin believes a greater emphasis needs to be placed on funding entrepreneurs and startups.