Banks must be pushed to lend to SMEs

Recent information that has been released by the Bank of England has said that small businesses are still finding it hard to get loans from banks. This is having a negative effect on the economy as it is preventing the growth of business and therefore having an effect on employment figures.

There have been several suggestions made by experts that might help to encourage banks to offer credit to small businesses. One of the most common suggestions is for the government to increase the amount of competition in the banking sector so that banks have to offer a better deal to keep their customers. Over 25% of all small business banking is controlled by one institution, RBS and 90% of the rest of the market is controlled by five banks.

Most small businesses will have some credit facility with their primary bank but the problem comes when they reach the limit of their borrowing. Small businesses will find it very difficult to get a loan from another bank and their primary bank will be unlikely to extend their credit limits.

Another problem that small businesses face is that the transparency of banks is very poor. There are many charges that are hidden when taking out a loan and small businesses will struggle to understand what options are available to them.

Many will also find that the banks will spend time trying to sell them services that they do not really need. This is because they carry higher profit margins than traditional lending which typically does not generate a great return for a bank. What is clear is that there needs to be a disruption to the banking system so that prices can be driven down and banks are forced to offer their business customers credit and a better deal on that credit.

This can be done by the government making it easier for new banks to enter the market. There are banks from abroad that want to enter the UK market but they are finding it difficult to do so. The government should also be encouraging new forms of financing to emerge in the market and be a real competitor to lending options from big banks.

For one, the systems proposed by Market Invoice or Funding Circle would have a positive effect on lending. What is clear from these new ideas is that there are small investors out there who want to lend money to small businesses but there is just not the easy facilities to enable them to do this.

One way to make this easier would be for the government to create a bond market for small to medium sized enterprises. There is already a market like this in place in Germany and many the government actually profits from such a market. It seems like a win-win situation for all of those involved.

Another important innovation would be the increased use of companies that are used to rate the credit worthiness of small businesses. These would help investors make the right choice on where to invest and make them feel safer about entering the investment market.

The government has taken some steps to improving the lending situation for small businesses but what is clear is that there is no perfect solution. More steps need to be taken to ensure a better lending environment for SMEs.