Jeremy Warner: 'Not guilty', plead bankers on small business lending

December 3, 2008

Outlook Forget the bankers, it may be as much suppliers and customers who are to blame for the present squeeze in small business lending. In launching its "charter for small businesses" yesterday, Lloyds TSB insisted that, far from reducing its small business lending over the past year, it had increased it by 18 per cent, with the average amount drawn rising from 50 per cent of overdraft limits to 58 per cent. These figures seem to conform with separate data from the British Bankers' Association suggesting an overall uplift of 10 per cent in lending to SMEs among the major banks.

Yet bankers are being summoned into Downing Street almost daily for a ticking-off by ministers over their supposed failure to lend. So what's happened to all the money? In part the discrepancy is explained by the fact that there used to be lots of specialist lenders around, besides the mainstream banks, who funded themselves almost exclusively with wholesale money, much in the way Northern Rock did in the mortgage market. With the credit markets now closed, these lenders have all but disappeared, leaving the mainstream banks to pick up the slack.

Both customers and suppliers also used to be an important source of credit to small businesses. Yet today, suppliers are loath to extend credit to firms they think might not be around to pay the bills, while, on the other side of the ledger, larger, more solvent customers are demanding extended periods for payment. Even the mighty Tesco, which is better than most at paying promptly, has on at least one slow-selling line of products extended payment from 30 to 60 days, and in some other cases has demanded discounted terms.

The upshot is that many businesses need a lot more working capital to keep trading. The Government, Britain's biggest procurer, has already said it will pay all suppliers within 10 days of delivery. Pressure must be brought on supermarkets and other large-scale purchasers to do something similar. Companies have to report their payment terms at Companies House. Some naming and shaming seems to be in order.