FLS lending rates sluggish but expected to improve

ACCESS to finance for small and medium-sized enterprises (SMEs) is set to improve with an extension of the Funding for Lending Scheme, the Bank of England has forecast.

However, the Bank has said that while bank lending increased slightly during Q2, overall levels were still flat.

The situation has been criticised by manufacturing SMEs, which have claimed access to the funding they need for growth is still restricted, despite the buoyancy in the sector.

In its update, the Bank said aggregate net lending to businesses remained negative in 2013 Q2. Within the total, lending to large companies was weak. But it said this was likely to partly reflect the continued use of alternative forms of finance by larger companies, which are better able to access capital markets.

It said net lending to SMEs was also negative in 2013 Q2, but the growth rate was less negative than for large companies.

“Going forward, SME credit conditions should be supported by the extension to the FLS announced in April, which provides additional incentives for participants to increase lending to SMEs both this year and in 2014,” it said.

It added that a large proportion of FLS participants had indicated their intention to participate in the extended scheme. Under FLS, banks and building societies are allowed to borrow money cheaply from the Bank provided they then loan that money to individuals or businesses.

Paul Fisher, executive director for Markets at the Bank of England, said: “The FLS is continuing to support lending to the UK economy with a range of indicators suggesting that credit conditions are steadily improving for households and firms, and FLS participants collectively expect net lending volumes to pick up over the remainder of this year.”

Dr Adam Marshall, Director of Policy at the British Chambers of Commerce (BCC), said the rise in business lending during Q2 was welcome but acknowledged the credit environment was not where it should be.

“Many dynamic, new businesses are still struggling to find the funds they need to fulfil their growth potential,” he said.

“Large and established firms often have little difficulty in accessing the finance they need, yet the acid test for the FLS has always been whether it can improve the flow of credit to younger, fast growing companies that could end up being the wealth creators of tomorrow. Unfortunately the door often remains shut for many of these businesses who can find themselves being discouraged from applying for finance. Those who do apply are often turned down for being too ‘high risk’.”