Invoice Finance market awaiting Q2 Project Merlin figures

In further contrast the to promises laid down in the Merlin Project, bank loans to small businesses fell by £2.5 billion in June 2011 from the previous month.

But the banks however have pointed out that they are not to blame, and that the Q2 Project Merlin figures will improve the situation for UK small and medium sized businesses.

According to a report from the British Bankers’ Association (BBA), lending decreased by a total of £2.5 billion in June and on the back of poor figures which resulted in Project Merlin missing its Q1 target by £2.2billion.

Under the Project Merlin deal, Barclays, Royal Bank of Scotland, Lloyds, HSBC and Santander promised to collectively lend £190bn to businesses in 2011. Whilst Q1 figures disappointed, at the end of June they had lent 49% of the £76bn promised to SME borrowers this year, and 53% of the overall annual target of £190bn.

So where did the appetite suddenly come from?

According to the June report which pointed out that rather than then banks refusing to lend money to small businesses, it was actually a case of the reverse with the fault in low lending figures a direct result of businesses no longer approaching banks to try and borrow money.

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

Up to the end of June, – which at last calculations was still a month in Q2 – the standpoint of the banks was that ‘UK businesses have no appetite for bank borrowing’. Yet in just a few weeks, newly released Project Merlin figures contradict the Banking Industry’s report?

Has UK small business suddenly found its appetite to borrow?

Not according to other research they haven’t, and in fact they never did have a reduced appetite for borrowing in the first place. One such survey by GE Capital showed that across the UK, businesses would like to invest a total of £75 billion in 2011 in order to grow.

The decline in lending  before the latest Merlin figures could be due to several factors such as the increased cost of borrowing for smaller businesses or the increased demand by banks for excessive security demands.  The former is the most likely factor as respondents to the GE Capital survey stated that they found borrowing too expensive.

In a survey amongst risk managers from banks across Europe, analytics provider FICO has seen a forecast that the “credit gap” for small businesses remains but it is easing.

Mike Gordon, Managing Director at FICO EMEA explained:

“Credit managers in the UK showed slightly better expectations for small business lending. While the credit gap for small businesses persists, the forecast is much smaller than five months ago, and both the demand and supply forecasts are higher. This suggests that government stimulus to encourage growth in small business activity coupled with government encouragement of lender programmes to fund small business borrowing are having an impact. The lenders we work with are striving to close the gap yet are mindful of the risks that face small businesses in the slow-growth economy.”

So if the banks were steadfast in that they were not to blame for Q1 figures, perhaps they too were not affected by repeated Government pressure to deliver on Project Merlin? Perhaps they were not also buoyed by more public anger and mis-trust over the PPI mis-selling scandal, or increased lending costs to businesses amid an all time low BoE base rate helping them recapitalise?

So presumably, this surge in lending is by pure coincidence and the banking industry won’t therefore claim any credit for the turnaround as in their words, they were not responsible for the poor Q1 figures so there was nothing to turnaround?

Whilst many will be buoyed by the Q2 Merlin figures, there is still half a year to go so it remains to be seen if the banks can be true to their word and maintain the lending figures through Q3 and Q4?

Borrowing is essential for business, as it is for any household. Whilst cash flow in both may change throughout the year  the lower availability of credit has meant that UK small business and households have not has the same access too, nor same costs as before in respect of their borrowings. Something which can be put forward as a reason for the growth in demand for payday loans with 2500% APR’s.

Cash flow aside, large purchases like cars for households or plant and machinery for business can’t normally be made without the use of more structure finance. Perhaps why leasing figures (both commercial and private) have both increased in recent years over purchase?

But when it comes to operational and day to day funding and finances, Invoice Finance products like Invoice Factoring or Invoice Discounting are brilliant at reducing the effect of 30,60 or even 90 invoice terms where there is a significant gap between good and services out, and monies inward.

However, whilst invoice finance products, which are closely linked to sales and turnover rates are great for managing cash flow, they are not suitable for a start up where there isn’t any invoices yet.

This is where a great deal of support is needed as for the private sector to pick up the slack in the jobs market as a result of the UK’s austerity measures, new businesses need to be created. And how do you start a business and invest in stock and equipment without access to more traditional forms of borrowing like loans?

Invoice Finance is a vital life line to many businesses but all of the customers of factoring providers have one thing in common. They all have outstanding invoices to put up as security for which monies can in turn be advanced against. Start-ups don’t have this luxury so let’s hope that new entrepreneurs are given the right levels of support in order to get their new ventures of the ground!


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