Published : 10 years ago, on 08/10/2014

Ian Currie, director of the corporate finance advisors Seneca Partners, commented:

“The banks’ reluctance to lend to small businesses began as a hindrance to economic growth, but is now morphing into a real threat.

“The reason is the striking imbalance between the banks’ attitude to business and personal lending.

“Just as lending conditions for consumers relax further, they are being wound ever tighter for small businesses. The tension created as these two trends pull in opposite directions will soon reach breaking point.

“The banks’ preference for consumers over businesses is understandable – they are easier to lend to, and their risk profile can be assessed using computer programmes alone. Banks that were hollowed out following the crisis no longer have the manpower required to make the more complex decisions required when lending to small business.

“This attitude is confirmed by the way loans are being priced. Spreads on personal loans – and on loans to big business – are narrowing as competition forces the banks to cut their profit margins.

“Yet for small business lending, spreads have not budged. It’s a sector that is verging on the dysfunctional. The banks appear unable or unwilling to lend, and lack of competition ensures that the cost of credit remains high.

“Government initiatives like the Funding for Lending Scheme have so far failed to unblock this essential credit pipeline, and there’s a grave danger that Britain’s economic recovery will be choked off when the country’s army of small businesses cannot expand to meet growing demand.

“It would be a cruel irony if runaway consumer demand were to run into a brick wall of businesses unable to raise supply, but that is where the dangerous schizophrenia of the banks’ attitude to lending is taking us.”