Belfast Telegraph

Cash-starved small firms suffer as business lending contracts further

By Graeme Evans

Business lending contracted for the fifth month running in July as small firms continued to feel the brunt of tighter credit conditions, the Bank of England said.

The net repayment of £2.5bn was an improvement on the £3.2bn recorded in June, but the Bank's latest Trends In Lending report highlighted that lending by major UK lenders remained subdued into August.

It also reported that while credit concerns were easing for larger businesses, they remained tight for smaller firms.

Most companies have been seeking to pay down debts in the wake of the recession, but smaller firms are being hit because they have fewer alternative sources of funding than large multinational firms.

"Contacts of the Bank's network of agents noted that while credit conditions were easing for larger businesses, they remained tight for smaller firms," the report added.

The spread, or profit, made by banks on loans to large firms continued to fall with new facilities to small and medium-sized firms broadly unchanged over recent months.

Overall demand for credit has remained subdued, it added.

The Bank has slashed interest rates to a record low of 0.5% and pumped £200bn into the economy through quantitative easing - buying up assets with newly created money - to boost the money supply.

However, provisional data showed M4 or broad money supply - bank and building society deposits and cash - fell by 0.2% month-on-month in August to take the annual growth rate down to 1.8%.

Analysts at Barclays Capital said the figure remained "very weak" compared with a pre-financial crisis average growth rate of close to 8% year- on-year.

Meanwhile, IHS Global Insight chief economist Howard Archer warned that pressure was mounting on the Bank of England to revive quantitative easing to help boost the economy.