Lending to businesses falls in June

Lending to small businesses declined last month, as firms remained worried that the UK economy continues to grow at a sluggish pace.

Bank lending to UK businesses fell again in June, according to figures from the British Bankers’ Association (BBA), suggesting that firms are cautious about borrowing during a period of tepid economic growth.

From May to June, net lending to non-financial companies – which is seen by many as the backbone of the UK economy – fell by £2.5bn, slightly higher than the £2.45bn fall seen the month before, the BBA revealed on Monday.

Borrowing contracted by more than the previous six month average decline of £1.4bn.

“Businesses, as has been seen elsewhere, are concerned about the economic outlook and, in weathering difficult trading conditions, they are putting off expansion or investment plans and limiting borrowing,” said BBA’s statistics director David Dooks.

The data comes a week after the Federation of Small Businesses (FSB) said that firms were less confident in the second quarter of 2011 than the previous three months, after its ‘Voice of Small Business’ Index dropped by 6.4 points from 6.7 to 0.3. “Strikingly, confidence in 13 of the 18 sectors monitored by the index is not showing signs of business confidence, with five sectors falling from a positive to a negative reading,” the FSB said.

“The economy is still in a fragile state and these figures clearly show that the Government's growth strategy is just not working. In an economy characterised by high unemployment and muted demand, more needs to be done to encourage businesses to take on staff and grow their business so that the recovery can really get back on track,” said FSB’s National Chairman John Walker.

Lending to non-financials totalled £314.93bn, down from £317.43bn in May, as repayments outstripped new borrowing given that demand remained weak, “most obviously in the building sector”, the BBA said.

Borrowing in the construction sectors fell by £614m to £37.06bn in June, as the levels of investment in the construction of commercial and domestic buildings fell quicker than the month before. The fall surpassed the six-month average decline in construction lending of just £14m.

“Of course, banks are keen to point out that it’s not their fault – even though anecdotal evidence suggests businesses are desperate to start investing again,” said Emma Haslett from business website Management Today.

The BoE’s Agents’ Summary for June showed that while larger businesses were able to borrow additional capital if needed, credit conditions remained tough for others: “Small firms generally perceived credit conditions to be very tight.  And many small firms were reluctant to approach banks in case it led to an increase in the cost of existing borrowings, or reductions in overdraft limits.”

“So it looks like the main thing putting them off is the sheer cost of borrowing. Which, of course, is set by the banks. And with base rates at a historic low, it could be time for loan rates to soften, too,” Haslett said.