For in-depth analysis on wider issues surrounding business credit risk look no further than Graydon’s In Credit blog.

More lenders join the Funding for Lending scheme

01 November 2012

The number of UK lenders involved in the Funding for Lending scheme (FLS) has increased to 30. The number more than doubled in the past month, rising from 13.

The banks currently signed up account for £1.33 trillion of lending to households and businesses. This represents around 80 per cent of lending in the UK economy.

The scheme, launched by the Bank of England, aims to boost lending by reducing funding costs. Under the scheme lenders can access funds at low rates of interest as long as they commit to grow the amount they lend.

However, according to the Financial Times, the value of outstanding loans eligible for low-cost funding has barley moved- underscoring the lack of competition in Britain's banking sector.

The newspaper wrote, "Even with 17 new lenders, the total value of loans covered by the low-cost funding arrangement has barely budged, rising to £1.3 trillion from £1.2 trillion."

The lack of competition means that the success of the scheme, and the impact it has on businesses, lies with the 'big six'. Five of the 'big six', apart from HSBC, have signed up.

In September the BoE's Paul Fisher noted how much control the largest bank have over the market. He said, "The six biggest lenders account for the vast majority of lending to UK businesses and households- and the seventh largest account for less than a third as much as number six."

There are signs that the scheme is beginning to work as consumer lending has grown. September also saw an increase in mortgage approvals. However it hasn't had a direct impact on businesses seeking lending.

Ernst & Young predicted that commercial lending would drop by 4.6 per cent in 2012. Many experts are still questioning the ability of the scheme to stimulate lending. Hilary Osborne, of the Guardian, argues that the scheme will result in banks using low cost lending to win 'tried-and-tested borrowers' rather than investing in those who need it most.

Mr Fisher continued, "Not necessarily every bank will support every sector. But if the big firms don't than the smaller banks will. We are relying on the pressures of demand and supply, and competition, to ensure that credit flows to where there is demand."

Businesses also need to take responsibility

Numerous surveys have shown that businesses want to grow but are struggling to obtain lending, particularly SMEs. Businesses can improve their chances of being approved for lending by improving credit ratings and having a proven track record. Graydon offers some tips on how a business can improve its credit score and its chance of receiving financial backing.

Lending is dwarfed by trade credit so it is equally important for businesses to pay and to be paid promptly, effectively managing their cash flow. Craig Evans, Head of Business Development at Graydon, said, "Trade credit is the biggest amount of available funding to businesses."

He added that it was 'absolutely' vital for businesses to be able to demonstrate good credit management.

Mr Evans explained, "With more and more trade payment data being used by credit reference agencies to provide more relevancy of the true creditworthiness of a company it is vital for businesses to be able to demonstrate they can pay their suppliers on the agreed terms.  This demonstrates the business has good credit management and could lead to further funding."  

Graydon provides a factsheet explaining credit ratings and how to use them to benefit a business.

The lack of competition in banking in the UK could mean that the FLS fails to have the desired impact. BoE's executive director for financial stability, Andrew Haldane, has said that the lack of competition was, in part, to blame for the banking crisis.

Speaking on Monday, 29 October, he added, "The most shocking statistic is that, up until 2010, no new bank had been set up in this country for a century."

 

This entry was written by Ranjna, posted on 01 November 2012 Bookmark the permalink. Follow any comments here with the RSS feed for this post. You can post a comment.

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