by Manos Schizas, senior policy adviser, ACCA
Since the UK government announced in June that it will be publishing a Green Paper on business finance, we have been expecting a renewed debate on small business lending. And we have got it – with the business secretary Vince Cable suggesting that banks could be compelled to curb bonuses and lend more to small businesses.
I'm sure our members can sympathise. In early 2010, banks saw their small business loan portfolios perform unexpectedly well – and bizarrely, they tightened the supply of loans in response. To be fair, these are still dangerous times for them. Interbank lending rates are on the rise and the spectre of sovereign debt still hovers over Europe. Banks may well need to raise more capital at the expense of remuneration, but the government should not be surprised if they then proceed to sit on this money rather than lend it to small businesses.
Even if the government can indeed have the best of both worlds, it should proceed with extreme caution. Not all loans are alike. After adjusting for inflation and changes to the stock of businesses, small business term loans outstanding are up 1% from their mid-2007 levels. Overdrafts, on the other hand, are down by 19%. Neither are all small businesses alike; some need one type of finance, some need another; others need to be left to fend for themselves.
The government may be able to compel (some) banks to lend, but it cannot make businesses borrow. Many have no productive use for debt in this sluggish recovery and those that have doubts as to whether their loan application would be successful simply don't bother; hence the high approval rates cited by the banks. Contrast this with small business' demand for credit card debt, where there are no gatekeepers: it has soared every single quarter since mid-2008.
Crucially, the government needs to live up to its promise to rebalance the UK economy away from debt. With both borrowers and lenders dropping out of the market for small business loans, the emphasis placed on it seems to be out of proportion. Even so, Vince Cable will have noticed that his department has just launched an excellent report into the activity of Britain's Business Angels. These may invest less in a year than banks lend to small businesses in a month, but more often than not they invest in high-growth businesses that are going places.
Let us hope that, in time, the business secretary will feel compelled to talk about them nearly as often as he does about the banks.