Businesses reluctant to borrow as lending falls by £4 billion

Figures yesterday showed that lending to UK companies fell by £4bn in the three months to November.

The Bank of England report suggests that smaller firms are particularly pessimistic about their prospects of obtaining finance and continue to focus on paying down debt.

The central bank blamed a lack of demand for corporate credit for the slide in lending and claimed that respondents to its recent credit conditions survey had pointed to an improvement in the availability of loan money.

Economists said yesterday’s trends-in-lending report offered mixed news while business leaders called for awareness of available credit schemes to be improved.

Recent mortgage data and comments from Bank of England officials and major lenders such as Lloyds have suggested that the Funding for Lending scheme (FLS) is beginning to have a positive impact.

FLS, which offers cheap loans to banks at a value tied to the amount they then lend to businesses and consumers, was launched last summer and is backed by the central bank and the Treasury. It is hoped the scheme can boost spending and investment and help aid a wider economic recovery.

Howard Archer, chief UK economist at forecasting group IHS Global Insight, said: “The [trends in lending] survey supports the view that the Funding for Lending Scheme is having a beneficial impact in lifting mortgage availability and approvals, and in making more credit available to businesses, particularly larger and medium-sized corporates.

“It also indicates that some lending rates are coming down due to reduced spreads and improved overall conditions in banks’ wholesale funding markets.

“However, for now at least, bank lending to businesses continues to fall. It is also a little worrying to see that smaller companies seem likely to see the least improvement in credit available.”

Matthew Fell, the CBI’s director for competitive markets, said: “Signs that lower borrowing costs are beginning to reach firms are encouraging and show that Funding for Lending is beginning to make an impact.

“However, weaker demand for finance indicates raising awareness of available schemes is crucial.

“The British Business Bank must be put into action without delay to ensure government support is visible and reaching businesses that need it most.”

Business groups have been critical of other attempts to kick-start the economy, such as quantitative easing, arguing that the benefits were not being felt by companies on the front line.