SMEs still being hit by high bank rates

The central bank said its Funding For Lending Scheme, which offers banks and building societies cheap funds in return for increasing lending, is helping homebuyers with lower mortgage rates at higher loan-to-value ratios.

But its November business conditions survey said “some business lenders appeared still to be tightening terms”.

“This was a particular problem for some SMEs (small and medium-sized enterprises), where the availability of overdrafts was said to be continuing to reduce, with banks preferring asset-backed lending and seeking additional personal guarantees,” said the Bank’s report.

“A number of firms had also seen a further deterioration in debtor days. Recently, some lenders had begun to make offers at lower interest rates, but firms’ awareness of such improvements remained low and some smaller firms were reported to be very reluctant to borrow.”

The FLS was launched in August by the BoE and the Treasury to boost the supply of credit to SMEs and homebuyers, backed by the UK’s ability to borrow cheaply on international money markets.

The central bank said: “The Funding for Lending Scheme appeared likely to have a more immediate impact on the availability of residential mortgage lending than on business lending.”

The BoE’s report, drawn from a survey of more than 700 UK businesses by agents including Yorkshire and the Humber representative Juliette Healey, also showed companies seeking alternative forms of finance.

“Among medium-sized businesses there was growing evidence of a drift to non-bank lending, with a number of contacts, including property developers, seeking longer-term finance than banks had recently been willing to offer,” they said.

“Bond issuance was being considered by some, institutional finance (both domestic and foreign) was being explored and the use of private equity was growing.

“A significant degree of forbearance by corporate lenders had continued.”

Some SMEs were also holding higher-than-usual cash balances, the BoE said, either to avoid debt or protect working capital.