Business lending drops by £500m

Lancaster And Morecambe Citizen: A new Bank of England report has found that business lending contracted by 500 million in the three months to February A new Bank of England report has found that business lending contracted by 500 million in the three months to February

Business lending continued to shrink in the three months to February despite the improving economy, according to a Bank of England report.

Overall lending to UK businesses contracted by £500 million in the three months to February, although the pace of the decline has slowed from a £3.3 billion fall recorded in the preceding three months, the Bank's latest trends in lending report has revealed.

Small business groups raised concerns about the latest findings, while banks put the negative lending figures down to firms using large cash reserves to pay down their debts.

The Bank's report said survey evidence indicates that pricing on loans to small and medium-sized businesses has remained "broadly unchanged" in recent months.

John Allan, national chairman of the Federation of Small Businesses (FSB), said this " underlines the ongoing challenges small businesses face in accessing finance to meet their growth ambitions".

He continued: "As the economy continues to gain momentum, ensuring small firms have access to finance is critical."

The Bank's report quoted a recent FSB survey which found that the majority of small firms continue to find that credit availability is "poor".

The Government's Funding for Lending Scheme, which helped to boost mortgage lending last year by giving lenders access to cheap finance, has been re-focused towards helping businesses for 2014.

In its recent credit conditions survey, the Bank of England said credit availability to the corporate sector is expected to expand further in the coming three months.

That survey said that "strong competitive pressure" has already prompted lenders to narrow their profit margins when it comes to lending to larger corporates, amid growing demand from big firms which are using loans to finance mergers and acquisitions and capital investment.

Richard Woolhouse, chief economist at the British Bankers' Association (BBA), said that low interest rates have helped to create good borrowing conditions for firms seeking to grow.

He said: "As the economy picks up, businesses are building up record cash reserves and paying off more of their debt, leading to an overall decline in net lending."

Mr Woolhouse added: "Seven out of 10 applications for business finance are approved so there's rarely been a better time to approach your bank."

The trends in lending report also showed that for mortgage borrowers, rates being offered on five-year fixed-rate deals are continuing to edge up slightly.

The average rate on offer for a five-year fix for someone with a 25% deposit has edged up from 3.34% in January to 3.45% in February and 3.47% in March.

For someone with a 5% deposit looking for a five-year fix, the average rate has climbed more slowly, from 5.44% in January to 5.46% in March.

Experts have suggested that both swap rates, which lenders use to price their loans, and the withdrawal of Funding for Lending for households are having an impact on the mortgage market.

Toughened rules are also set to come into place on Saturday under the Mortgage Market Review (MMR), which mean that people looking to buy a home or re-mortgage will face more probing questions from lenders to make sure they can afford to comfortably pay back their home loan, including as and when interest rates rise.

Mark Harris, chief executive of mortgage broker SPF Private Clients, said: "F ive-year fixes have started to edge up, partly as a result of higher swap rates... However, there are still five-year deals pegged at around 3% for those with sizeable deposits, which is excellent value."

He said the Government's flagship Help to Buy scheme has also had a significant impact in widening the choice of mortgages in recent months for people with only a low deposit saved.

Mr Harris said that once the MMR rules have bedded in, "the market should continue to perform strongly for the remainder of the year".

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