SME Exchange: The wisdom of a cautious approach to lending

THE MOST radical recommendation in Sir John Vickers’ Independent Commission on Banking, which was published on 12 September, was the suggestion that banks must introduce a firewall or so-called ring fence around their lending businesses to households and small companies, and that entity must hold minimum high-quality capital of 10%. Their investment banking operations will sit outside of this in the future.

The question for SMEs and entrepreneurs all over the country is: how will this affect the willingness and ability of retail banks to lend?

Lending to SMEs post-credit crunch has been a subject of considerable and often heated debate. The widely held view is that banks haven’t done enough to support businesses as the UK economy gradually pulls out of recession, potentially making the recovery slower than it might have been.

However, figures published by the Bank of England show that the main banks lent £53bn to UK businesses, of which £20.5bn was to SMEs, in the second quarter. This represents an increase of 22% on the previous quarter.

The Bank of England data challenges the received wisdom that banks aren’t lending. What does seem to be the case, however, is that they are being more cautious in their approach to lending.

Given recent experience, it would be difficult to argue that this is anything but a good thing.

The Vickers report proposes a range of measures designed to improve access to bank accounts for small business customers. In addition, the commission wants to ensure that the portfolio of branches being sold by Lloyds Banking Group introduces a strong challenger brand to the market.

Banks have been given until 2019 to implement reforms, so it will be some time before we know how these recommendations will affect the banks’ willingness and ability to lend to businesses. As UK banks control 85% of the business banking market, the introduction of more competition has to be a good thing on a very simple level.

If the perception – or indeed the reality – persists that bank finance is difficult to obtain, SMEs may continue to seek alternative forms of finance, such as issuing corporate bonds or seeking to list on a public market and raise cash from external investors.

But no matter what type of financing route a business chooses, it is critically important that a carefully prepared business development plan, with detailed and robust financial forecasts, is available. Proper business planning is the key to success. Without it, financing will not be made available, no matter how generous the banks are feeling.