Having grown increasingly frustrated at the failure of countless government schemes designed to get banks to lend more to companies, the Business Secretary has resorted to stating the obvious: that entrepreneurs need more alternative sources of finance. He’s right. With Britain’s painfully concentrated banking sector under pressure to repair its capital position, new sources of finance are a more likely solution to the credit impasse than flogging the ailing, if not moribund, horse of bank lending.
The problem is not a new one. The retreat of banks from SME lending since the financial crisis – albeit the likes of Santander and RBS are now making serious pitches for this market – has simply highlighted serious long-standing weaknesses in the British economy.
Our small companies are far too reliant on short-term debt provided by just five high street banks. Equity investment is chronically under-utilised, with less than 5pc of the UK’s small firms opting for it, and our woefully underdeveloped corporate bond market has left medium-sized firms unable to access the private placement market for long-term funding. Their counterparts in the US and Germany have used this route – tailored lending agreements with institutional investors – as an alternative when their banks aren’t interested.
In other areas, however, the UK is far from lacking in options. From asset-based lending, where small companies have cash advanced against their machinery or invoices, to online platforms, which match savers with credit-starved small companies or even allow private businesses to sell equity stakes to the public, there’s an array of alternatives available.
Sadly, there is often a chronic lack of awareness of them among business owners and none of them adds up to much yet in terms of market share. Some 80pc of all credit to small, growing businesses,which create the vast majority of jobs, comes from giant banks.
There are levers that Government can pull. One is regulation – the financial system discourages equity investment by providing tax deductions for debt interest payments but not for the dividends paid to shareholders, for example – and another is the work already being done to create a state Business Bank. But even getting companies to “consider the options”, as the CBI urged on Monday, would be a start. Mr Cable will be hoping business owners are listening.
