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February 18, 2011 04:09 ET

Banks Pledge GBP 76 Billion Available to Lend SMEs in 2011

LANCASTER, UNITED KINGDOM--(Marketwire - Feb. 18, 2011) - The long-awaited results of Project Merlin - basically a deal between the banks and the government - have finally been announced and not even the most pessimistic can fail to be a little cheered by the extra money banks are pledging to make available for lending to small businesses.

Under the terms of the deal, UK banks will agree to increase the amount of lending available to all business to £190 billion in 2011 – up from £179 billion of actual lending last year. 

Of that total, 40 per cent – so £76 billion - will be earmarked for SMEs. That equates to a 15 per cent increase on the £66 billion lent to SMEs in 2010.

Very importantly, the banks have also agreed that lending to SMEs will form part of the performance assessments for each bank's chief executive and of senior managers responsible for business lending. Quite how this will work, however, we don't yet know.

On top of this, there will be further money - an extra £1.2 billion - to support regional growth.

Of this, the banks will provide £200m of capital over two years to set up the Big Society Bank.

The remaining £1 billion will be used for potentially high-growth SME start-ups, and to make it easier for these businesses to get access to funding. The money will support SME growth in the regions through a network of regional offices through the government's Business Growth Fund, announced last year.

This is all good headline-grabbing stuff and, to be fair, the extra money is good news.

But, as is so often the case, there are Buts…

This lending will still very much be on what the banks consider to be commercial terms – in other words, while this amount of money is to made available, there is nothing to say the banks have to actually lend it; and, most importantly, the banks can charge what they like to lend it.

For most smaller businesses it is the charges banks insist on levying rather than the availability of money that is the real problem.

And, while we can probably assume the banks really are intent on boosting lending to SMEs, there is no suggestion that the cost of credit is going to fall because of this agreement and the extra money.

Businesses will still need to qualify for loans and the standard of qualification is still for the banks to decide; they can set the bar as high as they like. Many micro firms and start-ups simply don't look good enough lending prospects to the banks for them to advance loans on anything like workable terms.

As a recent survey by the Federation of Small Businesses revealed, around 84 per cent of small businesses are not approaching banks for credit, either because they have already been refused or because the cost is too high.

In response to the increased lending announcement, John Walker, the chairman of the Federation of Small Businesses, said: "Today's announcement should not be allowed to let the Government or the banks off the hook, and is a preamble to what we hope will be bigger announcements from the Independent Banking Commission. While we welcome the intention to lend more to small businesses, we still need to see a major restructure of the sector. 

"Many small firms aren't going to the banks to access finance and credit and the main problem they face is the cost of credit. Many small businesses have lost faith in the sector and are looking at other means of finance – and it is the smallest of firms that need finance most.

"To achieve robust economic recovery, the smallest firms and start-ups need to have access to finance, but today's commitments – as with previous lending targets – are unenforceable."

So, in short, we'll have to wait and see whether the agreement really will mean a great many more established SMEs and start-ups get access to the finance – and that means affordable finance – that they so desperately need.

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