THERE'S AVAILABLE CREDIT…. YET SME LENDING IS STILL FALLING
There may be a surge in business confidence, but of a resurgence in bank lending to business there is still no sign. Latest hard lending figures from the Bank of England continue to disappoint, with an appreciable drop in bank lending to businesses.
Net lending to non-financial companies fell by a further £2.4 billion in April, following declines of £2.5 billion in March, £633 million in February, £1.1 billion in January, £1.7 billion in December and £4.4 billion in November – the sharpest drop since the series started in April 2011.
Within this total, net lending to small and medium-sized enterprises (SMEs) fell by £629 million in April. Lending to SME’s had previously fallen by £1.1 billion in March (which was the largest drop since December 2012).
The Bank of England’s regional agents’ May report offered some clues as to why bank lending to businesses remains weak.
Although the agents reported that demand for credit had increased they also noted that, “it remained sluggish especially among small and medium-sized enterprises, as trust in banking relationships remained weak”.
The regional agents also commented that “some firms were likely to prefer to finance investment with their accumulated cash balances rather than with increased borrowing: in that context, many large companies had taken advantage of the opportunity to raise funds in the debt capital markets on favourable terms over the past year. In addition, Agents’ contacts reported that, although spare capacity in companies was limited, productivity growth, combined with steady – but not exceptional – increases in capital and labour should be sufficient to meet expected demand.”
The Bank’s credit conditions survey indicates that the overall availability of credit to the corporate sector was essentially unchanged in the second quarter after rising over the previous six quarters. The approval rate for loan applications for small and medium-sized companies was reported to have increased slightly in the second quarter.
Credit availability for corporates is seen picking up in the third quarter.
Slightly worrying though, says Howard Archer, economist at Global Insight, is that “the approval rate for loans from small businesses is expected to fall in the third quarter, while it is expected to improve slightly for medium-sized companies and be unchanged for large companies.”
Meanwhile, demand for corporate credit was reported to have picked up “significantly” across all company sizes in the second quarter and it is expected to rise again in the third quarter.
As demand for credit does pick up, it is, says Archer, “vitally important for sustainable, balanced UK growth that all companies who are in decent shape and who do want to borrow – whether it be lift investment, explore new markets or generally support their operations – can do so, and at a non-punishing interest rate. This applies to all companies, whatever their size.
“The Bank of England is now focusing the Funding for Lending Scheme entirely on lending to businesses. It has to be hoped that this increasingly has a significant positive impulse amid a much improved business environment.”
And, says Matthew Fell, CBI Director for Competitive Markets, “Although banks are making real efforts to support many of our ambitious companies, more must be done to help smaller businesses.
“If we are to re-balance the UK’s finance landscape we must unlock more direct investment from pension funds and insurers, ensuring growing firms are aware of the alternative finance options out there.
“We also need a tax system that better supports our medium-sized businesses to create jobs and growth.”
SCOTS SMEs 'MORE CONFIDENT THAN UK'
Scottish small business confidence is now higher than the UK average, the latest Federation of Small Businesses’ (FSB) quarterly report shows.
The FSB’s Voice of Small Business Index, published yesterday shows that while small business confidence is growing across the UK, an average firm in Scotland is currently more bullish than its counterpart in England and Wales.
The analysis also shows that, as spare capacity in small business falls, recruitment intentions are at their highest level since the research began in the first quarter of 2010.
The Scottish Small Business Index, the FSB’s measure of small business confidence, rose substantially to plus 44 points in the second quarter of 2014, up 8 points from quarter one. This represents a substantial improvement from this time last year, when the index stood at just plus 9 points. Half of the small businesses surveyed expect business prospects to improve over the next three months, compared to just 12 per cent who expect them to deteriorate. Across the whole of the UK, the Small Business Index rose from plus 35.7 points to plus 39.7 points over the first quarter 2014, while the share of UK businesses expecting conditions to improve held steady at 47 per cent.
The proportion of Scottish firms reporting that they are running below capacity fell from 52 per cent at the start of the year to 46 per cent this quarter. Looking ahead, only 33 per cent of firms expect to be running below capacity during the next three months. Revenue and profits are looking healthier, too, with 37 per cent of respondents expecting revenues to increase over the next quarter. A balance of 16 per cent reported increased profits during the last quarter and 26 per cent of firms anticipate higher profits in the coming year. Further, 19 per cent of businesses plan to increase capital investment over the next year, compared to 8 per cent at this point in 2013.
Says Andy Willox, the FSB’s Scottish policy convenor, “While it is nice to see Scottish small business confidence climb above the UK average, more significant is the continued rise in small business confidence across the UK. Further, reduced levels of spare capacity means that more businesses are looking to recruit.
“This is good news for unemployed Scots and for the recovery – as is the fact that one in five businesses plan to increase capital investment this year. More businesses placing orders with suppliers means more full order books, more materials to be sourced and more staff to be hired. That is the key to rebuilding our economy.
“No matter how confident we are, though, none of this investment will happen without finance. Although the position has improved since this time last year, it has hardly moved in the last three months. We’ll need to keep a close eye on this trend and ensure things don’t start to slip back. Having worked so hard to build a recovery, we can’t have it stifled by a lending market which lacks our members’ ambition.”
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RETAIL LEVY 'PUSHING BUSINESS OUT OF SCOTLAND'
Scotland’s £95 million large retail levy “looks designed to push retail investment elsewhere”, the Scottish Retail Consortium claims in a pre-budget submission to Holyrood.
It argues that the non-domestic rates system “is no longer fit for purpose. It is a disincentive to invest in commercial premises, the tax seems to only ever rise, and retailers pay disproportionally more than other sectors.”
A comprehensive longer term overhaul of the business rates system is required, which would increase retailers’ confidence about investing in property, create more jobs and help revive high streets.
The large retail levy or ‘Tesco tax’ was brought in to assuage small firm concerns that the retail super-stores were sapping business from the high street and putting traditional and family businesses in jeopardy. Others saw it as a pure and simple tax grab by the Holyrood administration.
And there other improvements, the SRC argues, that can be made to support the retail industry. “The small firms’ relief is a welcome acknowledgement of the need to keep down costs, and avoiding the repatriation of control over the poundage rate to local authorities is sensible.”
However, it argues, the £95 million large retail levy was a significant departure from poundage rate parity.
“It has meant that for three years 240 retail outlets are paying 28% more than equivalent stores in Wales or England. The levy has been a conspicuous blot on the Scottish Government’s claims to have the most competitive rates regime in the UK.
“Indeed, the policy appears designed to push retail investment elsewhere in the UK, rather than attract it to Scotland, the very antithesis of the argument that the First Minister has been making recently in seeking to “rebalance the economic centre of gravity across these islands”. We welcome the pledge not to continue with the levy.
The SRC recommends that Scotland’s rate poundage rises no faster than that in England, it comes good on its promise not to renew the £95 million levy and rejuvenate the Business Rates Incentivisation Scheme to ensure that revenues accruing to local government from it are transparently re-invested in aiding town centre regeneration.
Transport is vital to the success of the retail industry. With 23,000 outlets in Scotland, located in every town and village, retailers rely on access to good quality and reliable transport for the daily operation of their businesses – for ease of access for customers, to deliver goods, and to enable employees to reach the workplace.
“We fully support the Scottish Government’s plans to dual the A9 between Perth and Inverness, and the A96 between Inverness and Aberdeen, but would urge a more ambitious timescale for delivery rather than the two decades currently envisaged. Improved connectivity to the North and North East will help unlock the economic potential of these two regions, help get goods swiftly to retail outlets as well as, as is increasingly the case, direct to customers.
