Skip to main content

BANK LENDING TO SMEs IN WALES

Research by the Federation of Small Businesses last month showed that the investment intentions of small to medium-sized firms (SMEs) had reached a new high, with many planning to increase investment over the next 12 months.

To do so, they will clearly need access to capital and the main source of such funding remains the high street banks. But with the Bank of England showing that banks remain reluctant to increase their borrowing to smaller businesses, the economy may be danger of stalling if they do not sufficient access to capital to take advantages of opportunities in the marketplace.

Data from the British Bankers Association (BBA) which only dates back to the third quarter of 2011, enables an examination to be made of the supply of debt funding from banks in Wales over this period.

The latest information available shows that the current value of loan balances in Wales in the first quarter of 2014 was £4.216 billion, which is approximately the same as when data was first gathered in 2011.

However, the value of overdraft balances had fallen by 13 per cent over this same period from £672m to £581m. This currently represents 4.8 per cent of the total UK lending by banks (loans and overdrafts) to SMEs, with 87.9 per cent of all banking in lending in Wales being in the form of loans, slightly lower than the UK (89 per cent).

During the 12 month period 2013-2014, the banks approved 12,148 loan facilities for Welsh SMEs with a total value of £1.03 billion. The average loan was £84,780, the second lowest of any UK region, with an average loan of £58,433 for small firms and £300,185 for medium-sized firms.

A total of 14,369 overdraft facilities were also approved for Welsh SMEs over the same period with a total value of £313 million. The average overdraft for SMEs was £21,798, the second lowest of any UK region with an average overdraft of £17,977 for small firms and £56,638 for medium-sized firms.

Given this, what is the gap in funding for Wales? If we assume that the banks’ approval rates for lending are an average of 70 per cent, as the BBA (2013) suggests, then we can estimate that around 5,000 firms are turned down for a loan every year with a total funding gap of £443 million although a proportion of these may have applied more than once.

Similarly, around 9,300 firms are refused an overdraft with a total funding gap of £203 million. Again, some may have applied for both an overdraft or a loan and been rejected for one or the other but this data is not available.

Further analysis of the BBA data shows that the amount of loans and overdrafts available to SMEs in Wales has decreased by £101 million (or -2.1 per cent) between quarter 3 of 2011 and quarter 1 of 2014. However, it would seem that the biggest issue is with those smaller firms with an annual turnover of less than £1million. They have experienced a decline of £158m in the value of loan balances for small Welsh firms, which is the largest overall decline of any UK region over this period.

The data shows that the number of new loans to smaller firms has increased, although the average loan has decreased from £71,720 in Q3 2013 to £50,113 in Q1 of 2014. This reflects various conversations I have had with key stakeholders in the Welsh financial world that smaller firms that are struggling to get the finance they require from the banks.

This view is also evidenced by the findings from the latest Bank of England Agents’ summary of business conditions that suggests that whilst credit availability has continued to improve gradually, conditions remained tight for the smallest businesses.

There has been a 22 per cent decline in the number of overdrafts for small firms as well as a £52 million decline (or 14.2 per cent fall) in overdraft balances during this period. To explain this trend, banks have indicated that the reason that small firms’ overdrafts had been withdrawn or converted to loans or invoice discounting was because of a lack of utilisation. For example, the BBA have suggested that  only around 55 per cent of overdraft facilities are currently utilised by SMEs. Whilst this leaves almost half the agreed borrowing commitments available as ‘headroom funding’ for businesses to draw on, it is reducing year on year.

But it is not only smaller firms that are failing to get access to capital. With regard to those medium-sized enterprises that the CBI and others see as key drivers of the economy, the number and value of loan and overdraft facilities to medium-sized businesses has also declined over this period at a higher rate than for the UK which suggest that there has been a reluctance by the high street banks to fund all sizes of SMEs in Wales.

Therefore, the banks’ own data suggests that in Wales, there remain real issues when it comes to providing access to capital to both small and medium sized firms. As the economy continues to grow, it is critical that those firms that wish to expand their operations get the necessary capital to do so and one can only hope the banks will step up their lending to those sustainable businesses that can help transform their economy. If they do not, then there are a variety of alternative sources of funding that could and should be promoted to fill any gap in finance in the future.

Popular posts from this blog

THE CRACHACH

Unlike me, do you consider yourself part of 'the establishment' here in Wales?  As thousands gather for the Eisteddfod in Mold this morning, they will, according to some social commentators, not be participating in the greatest cultural festivals of Europe. Instead, they will merely be bit-part players in one of the annual gatherings of the great and good of Wales.  Unkindly, this set of the movers and shakers in Welsh society is known as 'the crachach' , and constitute a social class all of their own, dominating the educational, cultural and media sectors of Wales and allegedly looking down upon any outsider with new ideas, reinforcing mediocrity and failing to see beyond the limits of their own narrow experience.  They are said to live in a comfort zone that awaits the expected invitation to the next glass of chilled chardonnay and canapés, forgetting that due to their lack of leadership and drive, Wales remains firmly rooted to the bottom of the UK prosperity league ...

THE IMPORTANCE OF THE CREATIVE CLASSES

One of my favourite academic books of the last two decades must be the “Rise of the Creative Classes” by Professor Richard Florida.  This was one of the first detailed studies of the growing group of individuals who use their creativity and mental labour to earn a living and not only included those in arts and entertainment, but also people working in science and technology as well as knowledge-based professions such as healthcare, law, business, and finance.  Fast forward to 2022 and Professor Florida has written an updated report on the creative classes although he and his team now identify a different type of individual who is taking full advantage of the growth in digital platforms, social media, and online marketplaces.  Such ‘creators’ are defined as those who use digital technology to make and publish unique creative content, whether in the form of video, film, art, music, design, text, games, or any other media that audiences can access and respond to.  They ...

THE IMPORTANCE OF FRANCHISING

When we talk about start-ups and entrepreneurship, rarely do we discuss the potential of franchising not only as a way of establishing new ventures in the economy but also as a method of growing existing businesses. According to the British Franchising Association, franchising is the granting of a licence by one person (the franchisor) to another (the franchisee), which entitles the franchisee to own and operate their own business under the brand, systems and proven business model of the franchisor. The franchisee also receives initial training and ongoing support, comprising all the elements necessary to establish a previously untrained person in the business. This enables individuals to start their own businesses without having to develop their own ideas and utilising an existing brand and established market. Of course, whilst each franchise business is owned and operated by the franchisee, the franchisor controls the quality and standards of the way in which the business is...