Unsecured Loans to Business in the UK – Key Trends and Opportunities to 2019

Date: 2015-09

“Net lending to small and medium-sized businesses was positive during four of the six months to March 2015, increasing by 1% from December 2014, while net lending to large businesses increased almost by 2% during the three months to March 2015. Gross lending to all businesses has registered growth since the start of 2013, mainly due to an increase in the availability of credit. Outstanding lending declined during 2014, despite increased gross lending, due to a substantial growth in repayments: 15%, 13% and 22% for small, medium-sized and large business respectively.

Interest rates remain at a historic low, and have been falling consistently since the Bank of England cut the central bank rate to 0.5% in 2009. The Bank for Englandโ€™s quarterly Credit Conditions survey found that lending rates to small businesses remained broadly unchanged during the first quarter of 2015, while respondents indicated that rates had fallen significantly for medium-sized and large businesses.

The government has made several attempts to reinvigorate business lending over the last couple of years, however its projects have failed to have the desired effect. The flagship Funding for Lending scheme (FLS) began slowly and fell short of its initial GBP80 billion target by GBP20 billion in 2012. However, improvements have been made seen since 2014, and a substantial increase in the money lent through the FLS directly led to both outstanding stock for small and medium enterprises (SMEs) and new term lending to large business increasing. Project Merlin โ€“ the Governmentโ€™s agreement with the โ€˜big fourโ€™ banks to increase lending to small businesses โ€“ fell GBP1.1 billion shy of its initial target.

The rise of the emergency 0.5% bank rate is set to make access to credit more expensive for banks, and subsequently, for businesses. With banks already wary of lending to smaller businesses, this may result in a decline in loan approvals, while businesses themselves are likely to be deterred by the prospect of more expensive loans. The Office for Budget Responsibility (OBR) altered its forecast in March 2015 and anticipates the rise to occur in mid-2016, as opposed to later this year. This gives banks and businesses extra time to prepare for the additional costs while the economy grows.

The industry is dominated by mainstream banks, with the โ€˜big fourโ€™ of Royal Bank of Scotland, Lloyds, Barclays and HSBC controlling over 80% of the market. Regulations and high costs make it a difficult industry to enter. Therefore, any real competition is sparse, although peer-to-peer lending has risen sharply over the last few years โ€“ it almost doubled in 2013 โ€“ after offering smaller businesses a viable alternative if bank loans are unavailable or too expensive.”

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