Lenders are continually pressed to justify practices and show success contributing to a vital economy – especially following the major economic downturn experienced in 2008. Since the crisis, lending practices and principles have been subject to heightened levels of scrutiny, resulting in an entirely transformed industry that is just now finding footing amid economic recover. As markets improve globally and the damage caused by runaway lending policy is corrected, a new focus is placed upon creditors, which are now expected to stimulate financial markets by extending more credit. In particular, there has been an ongoing call for more small business lending.
Mixed Results for Businesses
One study commissioned by the Treasury shed light on consumer attitudes and the future of small business lending. According to the report, higher levels of competition and greater access to alternative funding may be what are needed to fuel growth in small business lending.
Government research has proven that businesses seeking financing are quickly discouraged when banks turn them down for conventional loans. Rather than seeking alternative funding or pressing for access to conventional credit, many organizations simply dismiss their plans for growth and put spending on hold. The clear implications for sustained economic recovery include slower growth, fewer jobs, and less tax revenue for the Government. The stakes are high for the public and private sectors, so initiatives are emerging from partnerships that bring together business and Government leaders to stimulate lending and spending.
Demand for financing is a strong indicator for measuring the health of the UK business climate. The Treasury-backed study highlighted frustration among business decision-makers, indicating eighty-five per cent did not approach a lender for financing during the twelve months leading up to the study. The data illustrates that despite gains, the positive momentum has not translated into a rise in net lending. The trend is especially discouraging in light of encouraging signs business lending showed last year.
Although major banks process more than 80% of SME loans, alternative funding has become more popular since the economic crisis. Invoice financing, crowdfunding and peer-to-peer lending, for example, are gaining ground as creative entrepreneurs navigate the new lending frontier. To support transparency and higher levels of lending competition, the Business Banking Insight website tracks various business experiences with lenders, furnishing valuable perspective for those seeking financing. Survey data is updated every six months, providing an up-to-date reference about dozens of banks. Businesses in need of asset financing, commercial mortgages and money for international trade will benefit from the database.
In addition to helping consumers evaluate creditors, the site provides valuable data for lenders, themselves. One trend highlighted on the website, for example, illustrates the lack of available funding for relatively new businesses and start-ups. In fact, endeavours less than five-years old are unlikely to get financing, according to the site. Lenders are urged to study information like this gleaned from the site, in hopes it will spur greater industrywide competition.
Critics point to shortcomings on the Chamber of Commerce-backed website, which largely fails to represent independent lenders. Alternative forms of business lending, like invoice financing, for example, are only broached in terms of major banks, leaving independent providers out in the cold.
The complex business lending industry continues to evolve, so it remains hard to generalize about current conditions for small and medium-sized businesses. What is certain, however, is that a more stable environment would benefit the business lending industry, which has seen dramatic peaks and valleys in recent years. While some businesses are finding needed capital, new endeavours appear to be shut-out of the process, due to strict lender requirements. Through greater consistency and transparency, the Government hopes public and private initiatives will work together increasing access to credit for businesses of all sizes.
Image credit: Department for Business, Innovation and Skills