Following this week’s release of the green paper on bank lending it seems George Osborne and Vince Cable have highlighted their concern to get banks lending to small businesses again. This approach is at best unfocused and at worst a complete waste of time and energy.
The coalition government is relying on the private sector to take up the slack in the economy caused by public sector cuts and to drive growth. They also acknowledge that smaller businesses will be the engines of that growth and, particularly of job creation. They’re concerned that a lack of availability of finance will prevent small businesses from growing and fulfilling this vital role. So, they’re using a lot of government and civil servant time to dream up “carrots and sticks” to encourage banks to lend to small businesses again.
Why are they doing this? The government’s own recent figures show that the economy grew in the quarter to June 2010 by 1.1%, which is ahead of forecast. At the same time, bank lending is decreasing by around 6%. If growth is primarily driven by small businesses and the economy is growing ahead of forecast, at the same time as bank lending is decreasing, where’s the problem?
It would appear that the UK’s heroic owner managers and entrepreneurs have adapted to the new situation and are growing their businesses without bank lending!
One could argue that this conclusion is supported by the banks’ claim that one of the reasons that lending to small businesses has declined is that there is less demand. In addition, a recent survey by the Forum for Private Business showed that only 6% of small businesses see financing as a factor that would help their business grow. In which case, notwithstanding the many examples of individual businesses who have had horrendous experiences at the hands of faceless bank decision making processes., putting more pressure on the banks to lend to small businesses is a waste of time and energy since there isn’t a problem that needs solving.
The government might argue that, while it’s fine for now, the lack of bank lending will cause a problem later in the recovery. Of course, the banks are reluctant to lend, particularly to small businesses in general, because they’re also being told that their risky lending habits in the past created the credit crunch and that they must rebuild their balance sheets and liquidity and then take fewer risks with lending. And, small businesses are generally seen as higher lending risks than large ones.
It’s well-researched, and shown again in a recent study by NESTA, that the majority of jobs in any developed economy are created by a small proportion of established, smaller businesses which have the ambition and potential to achieve high-growth. Of the total of nearly five million businesses in the UK, at the most, there are perhaps 100,000 which have this ambition and potential to grow.
If the UK government is concerned about creating the most number of sustainable jobs in the shortest time, then it should be focusing on this select group of businesses - not the whole five million. These are the businesses which should be able to present good investment cases and are probably able to access the finance they need anyway.
That’s probably the story behind the figures. The banks have cut lending across the board while the good businesses with ambition and potential are still managing to grow and drive the recovery.
The way the current government strategy is being presented suggests that banks should lend more to all small businesses – just because they’re small businesses! And the government is prepared to use strong arm tactics to make the banks do that. While it might be politically good to be seen to be taking a hard line with the banks just now, this approach doesn’t makes good commercial sense and leads to unnecessary friction between the government and the banks. And that friction is, again, a complete waste of time and energy.
Since 2001, Gerard Burke has helped over 1,000 ambitious owner managers create the future they want for their businesses and for themselves. He is the founder and managing director of Your Business Your Future, the UK’s leading specialist provider of development programmes for ambitious owner-managers. Your Business Your Future programmes are delivered in partnership with Cass Business School in London.
www.yourbusinessyourfuture.co.uk