Drop in demand for credit from small companies

The availability of credit to businesses is expected to further increase over the next three months, said the Bank of England (BoE) in its credit survey, as its Funding for Lending Scheme (FLS) kicks in.

The central bank launched the FLS in August, rewarding banks and building societies with cheaper borrowing if they hike lending to homebuyers and businesses.

It said demand for mortgages increased in the fourth quarter (Q4), with the availability of credit also increasing “significantly”.

“Lenders reported a slight increase in demand for credit from medium-sized companies in Q4, but a reduction in credit demand from small companies,” said the survey.

“Looking forward, demand for credit was expected to increase slightly from small and medium-sized firms in 2013 Q1, but demand from large firms was expected to remain broadly unchanged.”

The BoE has insisted the FLS will take time to boost businesses, citing “lags involved in banks changing their lending strategies and in potential borrowers submitting loan applications”.

The report said the overall availability of credit for businesses increased “significantly” in Q4. Large and medium-sized firms saw the biggest increase, with a “slight” increase for small companies.

“The Funding for Lending Scheme was widely cited as contributing towards the (latest) increase in secured and corporate credit availability,” said the BoE.

Hiking the flow and take-up of credit by small firms is seen as vital to stimulating economic growth and avoiding a triple-dip recession.

“Smaller companies may not benefit as much as larger and medium-sized firms, which would be disappointing given that it is a lack of available and affordable credit to smaller companies that has been of particular concern,” said Howard Archer, economist at IHS Global Insight.

While the survey pointed to better mortgage terms, improvement in lending terms for businesses was patchier. Spreads on loans to large and medium-sized firms narrowed substantially in late 2012 but remained broadly unchanged for small firms. Bank spreads are the difference between their borrowing and lending rates.