Business lending: Are lenders willing to lend?
The past year has revealed which businesses and sectors are resilient and exposed a number that are not. Many of those that have survived have restructured, shifted online, or sought new income streams to survive, and some have taken advantage of the pandemic and become more profitable. For many, cash has been abundant thanks to the government-backed schemes which have also allowed lenders to establish new relationships with clients they didn’t previously have relationships with.
In November 2020, the latest month for which the Bank of England has released its Money and Credit statistics, UK businesses borrowed £2.1bn in bank loans. And while larger businesses have been making net repayments since May 2020, SME borrowing has steadily increased, reaching a 25% increase in net lending to SMEs by November, the highest level of lending on record.
It is also interesting to note in the graph below, the sharp increase in large business lending seen between February and May 2020 and how this rapidly declined during the rest of the year with net repayments in the final months of 2020.
Source: Bank of England, Money and Credit Statistical Release, January 2021
While demand for loans, particularly among SMEs, remains high, it seems that the high street banks have been cutting back for a few months. Having lent money liberally in the early periods of the pandemic, banks have hardened their positions in recent months, approving fewer CBILs loans and in some cases, clawing back a number of bounce back loans.
Bank withdrawal from the market has, however, made way for secondary lenders, many of whom were accredited by the British Business Bank late last year. Secondary lenders, whilst lending with much higher rates of interest, are still approving CBILs loans, many of which are repaying BBLS loans to the banks. While their usual model is often to lend against assets with a personal guarantee, they are often now replacing existing loans and asset based facilities with government-backed ones. Alternative lender Nucleus has declared its intentions by recently announcing that it has secured £200m from investment management firms to allow it to continue to fund SME loans.
But while secondary lenders are willing to lend, it is perhaps not surprising that the major banks are starting to cut back. Traditionally, SME lending has not been very profitable for banks, mainly due to the high total costs, estimated to be around £3,000 per loan. While the main banks introduced new automated systems to help them cope with the sheer demand for CBILS and BBLS loans over the last year, their systems are struggling which is hardly surprising given the concern about fraudulent applications. This is despite the fact that most high street banks will only deal with existing customers and for some time have not accepted new business customers citing the need to prioritise existing customers. This has left a lot of small businesses without access to loans including those with pre-pandemic issues and some who bank with smaller banks that have not embraced the government schemes. Digital challenger banks, on the other hand, have responded to this freeze, by becoming accredited and making it known that they are ready and willing to take on new business customers.
In Europe, the picture is similar, with banks cutting back on lending. According to the European Central Bank’s January 2021 bank lending survey, Europe’s banks have €2tr out on loan to SMEs, two-fifths of what is on their business loan books. Along with low interest rates, banking regulators fear that too many defaults could mean big losses for the banks and in Q4 2020, European banks tightened their credit standards due to uncertainty about economic recovery in the context of renewed Covid-related restrictions.
