Business lending

Plumbing problems

The flow of credit to British business continues to dry up. But the latest
policies may yet open the tap
Jan 12th 2013 | from the print edition

IN 2004 David Tizard decided to go into the beermaking business. Working from a small site, things
went well. The Waltzer, a chestnut-coloured bitter,
was a bestseller. Joined by his partner Abigail Cutts
in 2009, he took over a Nottinghamshire pub and
was soon producing and selling up to 1,000 pints per
week. But demand for the beers at the pub started to
outstrip their ability to supply. Orders from
wholesale clients had to be turned down too.
Aiming to quench her punters thirst, Ms Cutts set
out a plan for a modest but significant expansion. An
investment of 100,000 ($160,000) would renovate the pubs disused function room, converting it into a small
brewery. That would have boosted capacity and allowed the brewery to create a wider selection with which to
compete at beer festivals.
To finance the expansion, Ms Cutts planned to raise 50,000 secured against the value of the pub building. But her
business manager refused to back the plan: the bank, he said, had no appetite for speculative lending. Other big banks
told a similar story. The brewerys expansion, which included taking on a full-time paid apprentice, ran aground.
Stories of businesses being refused credit at any price are piling up. The problem is most acute for small businesses
but is hardly restricted to them. Annual net lending growth turned negative in May 2009 and has not been positive
since. The latest data, released on January 4th, show that lending fell by over 4% in the year to November 2012an
even faster rate of decline than in previous months. In America, by contrast, commercial and industrial lending
suffered a short sharp shock but recovered two years ago and is now growing at close to its pre-crisis rate (see chart).
In part, this reflects a lack of decent demand for loans. Fearful of weak
demand, many British firms are unwilling to invest or expand. Some
of the tycoons that are prepared to load up on debt are best avoided.
But tight credit is also a result of persistent problems in the banking
system. British lenders are struggling to bolster capital to asset ratios;
one way to do this is by cutting assets, including loans. In addition, the
banks have themselves faced high costs of credit when selling their
debt to investors. These supply problems explain why the interest rates
faced by businesses and households have stayed stubbornly high even
though the Bank of England has cut its lending rate to 0.5% and
launched two rounds of quantitative easing, in which government
bonds were bought with newly created money, lowering their interest
rates.
Many attempts have been made to ease business credit. First, in
January 2009, came the Enterprise Finance Guarantee scheme, which
offered banks a government guarantee worth 75% of loans to small businesses, lowering the risks faced by the banks.
Lending continued to plummet. Next, in 2011, the Project Merlin agreement between the Treasury and the biggest
lenders aimed to provide 190 billion of new credit to businesses. But the reduction of old loans outweighed the new
ones: despite 215 billion in new loans, net lending declined again. Then came the National Loan Guarantee Scheme,

which uses government guarantees to lower the cost of banks borrowing from marketsand yet more lending
contraction.
The Bank of England and the Treasury activated their latest wheezethe Funding for Lending Scheme (FLS)last
August. Banks can borrow from the Bank of England at cheap rates, lowering their funding costs. The FLS is well
designed, argues Jason Napier, an analyst for Deutsche Bank, but expectations need to be realistic. Although the FLS
will help, the banks hit hardest by the financial crisis, including RBS and Lloydstwo of Britains biggest lenders
are likely to continue to shrink in 2013. The headwinds are gales.
Yet there are reasons for optimism. The FLS is much bigger than previous attempts to unblock lending, with access to
cheap funds set at 5% of the current stock of lending (that is, at 80 billion) and increasing in line with any new
business loans. And there are early positive signs. Banks borrowing costs fell by one percentage point in the second
half of 2012. American experience shows that when banks borrowing rates return to normal, helping loan supply,
business lending can rebound quickly in a growing economy. Finally, the scheme could be simply expanded: if
conditions remain tight, access could be extended to 10% or 20% of the stock of loans, cheapening bank funding
further.
Until the latest attempt to ease credit supply kicks in, firms refused bank credit will need to be more inventive in
finding funds. Ms Cutts used a combination of personal credit cards and borrowing secured against brewing
equipment to ensure that her brewery could expand and take on a full-time worker. But the triumph is bittersweet.
Wary of banks, and with pricey credit-card debt to pay off, the microbrewery aims to minimise its reliance on banks.
Further expansion is likely to come from profits, which will take time to build. More pints are flowing but there are
no plans at present for any more investment, let alone employment.