Credit conditions are a reflection of both supply and demand. The Bank of England’s latest credit conditions report showed that overall availability of credit to the corporate sector was unchanged for businesses of all sizes and overall availability was expected to remain unchanged in the near term. At the same time, demand for corporate lending from businesses of all sizes was unchanged and demand for lending was expected to decrease slightly for small and large businesses and was expected to decrease more materially for medium-sized businesses. The Bank has also confirmed that, even under stressed conditions, lenders have the capacity to continue to lend and support the economy. This may seem somewhat counterintuitive. Surely as pressure mounts, the demand for finance would increase and, as risk increases, banks would tighten policy and pull in their horns? Perhaps we need to unpack this.

Putting it into context

The context is predicated on the starting position of the business sector. £80 billion of finance was provided largely to small and medium sized businesses on government schemes through the covid crisis and the net impact of that on total outstanding borrowing was an increase from around £167 billion to £205 billion, a 23 per cent increase in borrowing, down from a peak of £215 billion. At the same time, there has been a rise of at least as much in credit balances and because so much of this was on loans repayable over six or, in many cases, ten years, balances on revolving facilities like overdrafts and invoice finance fell leaving substantial headroom below limits.  That is beginning to change as use of working capital facilities increase and debt is paid down but the aggregate position remains one of comparatively strong liquidity and cashflow lenders eager to help. In fact, there have never been so many finance providers available to businesses.

That’s not to say that this is evenly distributed, as many of the smallest businesses that had never borrowed now have debt. Some sectors have become comparatively more leveraged, as we might expect in retail and hospitality, and individual businesses within all sectors have fared differently. Commentators have pointed to the sharp rise in insolvencies. Again however, it is important to look at the context. Insolvencies were substantially put on hold partly through the support provided, partly through temporary legal changes, so a catch up was to be expected.  Looking at portfolios as a whole, our members are telling me that their books remain in relatively good shape and the credit quality of those applying for finance is strong.

The impact of rising interest rates

Rising interest rates will certainly have an impact. It is worth remembering that while a rate of 1.75 per cent is historically low, if you are paying, say three per cent over Bank Rate, your interest payments are over 50 per cent higher than they were when Bank Rate was 0.1 per cent. When making credit decisions, lenders do consider the impact of possible rises in interest rates, so in most cases that should be accommodated. What’s more, 50 per cent of SMEs (including those Bounce Back Loan borrowers) are now borrowing on fixed rate, compared to only ten per cent three years ago.

If you are serving a consumer market, especially in what might be regarded as non-essential products and services, it is highly likely that the continued squeeze on disposable income will impact demand and constrain the ability of businesses to pass on cost increases such as for energy and wages. Equally, we have seen in surveys that investment intentions are faltering, and suppliers of capital goods are also subject to that. Export markets are tough given the slowdown globally and continued disruption and friction across borders. And, as with the poorest consumers, it will be the smallest businesses that feel the pressure more acutely.  That’s why the Financial Conduct Authority (FCA), while recognising lots of good practice, has reminded us that supporting customers in financial difficulty, identifying vulnerability and referring to sources of support like Business Debtline is vital for the likely upheaval.

Thinking positively towards opportunities

However, there are opportunities too. Digitisation has opened up new markets and, alongside a ready supply of debt finance, equity investors have continued to back innovative businesses. Net Zero plans are providing for substantial investment from refurbishment of buildings to the greening of the energy mix.  The entrepreneurial energy of ambitious individuals from diverse communities in the UK are seeking finance and banks and finance providers are competing hard to support them. Globally there are untapped markets well-disposed to British goods and services where we are competitive not just on price at current exchange rates but in quality with our world class reputation in creative industries, professional services and dare I say finance!

UK Finance and our members are working closely with the British Business Bank and government on finalising the details to make available the latest iteration of the Recovery Loan Scheme and this will play a useful role in the armoury of many lenders. Moreover, with a better balance between types of finance including an invoice finance variant, the ability of directors to provide personal guarantees to support more lending and balance the risk for the taxpayer, means that this will be much more a complement to commercial lending rather than a substitute for it. 

One of the positive legacies of the experience we have all had in dealing with the series of shocks that the governor of the Bank of England highlighted, is that we have a commitment and capability to collaborate more than we’ve ever done. That extends to the business group leaders we meet on a fortnightly basis. Finally, I wouldn’t underestimate the resilience of our SMEs, their agility and commitment.  Sometimes, the best new businesses are forged in tough times.