Businesses seeking alternative funding to bank loans

In the past two years, the number of businesses that are taking out a loan, or a bank overdraft, has fallen.

This revelation has come out of a survey that was conducted by the Federation of Small Businesses.

It was recently shown that in the last year, bank lending shrunk in every quarter and many people see this as an embarrassing failure of the government’s Project Merlin.

The largest banks in the UK failed to meet targets that have been set about how much they should be lending to small businesses. The figure was missed by over £1 billion, however, the amount of money lent to businesses, big and small, did grow overall by just under £25 billion.

RBS was the main reason there was a shortfall in the amount of lending to small businesses. The other four major banks in the UK, Barclays, HSBC, Santander and Lloyds all managed to meet their targets. This is despite RBS being over 80 percent owned by the government.

Stephen Hester, the chief executive of RBS, has defended his bank saying that the amount of lending they did was similar to what all the other banks lent when combined. The banks previously agreed to increase lending to small companies to nearly £80 billion and also increase lending to all types of businesses up to £190 billion.

11,000 members of the FSB took part in the survey and it found that only around one in three used their overdraft facility last year. Around 10 percent took out a secured bank loan with even less than that taking out one that was insecure. This is a significant drop in the amount of lending that was taking place in 2009. A similar number of businesses, again around one in three, said that they used savings to fund their businesses.

The use of savings was especially true among companies that had recently started trading, with 70 percent saying they turned to this form of funding. Furthermore, nearly 35 percent of companies said they borrowed money from family or friends and only 25 percent use the bank overdraft.

The chairman of the FSB in the Wessex region is Ken Moon, and said, “The amount of money being lent overall is bigger than the target but it just goes to show that more money is being lent to bigger companies. We need more money to be given to smaller firms so they can take advantage of growth opportunities. Research has shown that credit is being refused to small companies and they are being forced to find other means of funding.”

The British Bankers Association commented that the large banks do have a commitment to lending to businesses which is shown by the figures. They also pointed out that information from the Bank of England has shown that the demand for credit from small companies actually fell during three out of the four quarters of last year. The government stated that they will not be repeating Project Merlin in 2012.