Western governments have been trying to boost bank lending, especially to small and medium-sized businesses (SMEs), ever since the 2008 collapse of Lehman Brothers in the US — while banks have been resisting, looking to repair their balance sheets by reducing their loan books.
The reluctance of Western banks to lend — under pressure to shore up their capital wealth and for being too easy-going with their lending in the past – has been a key factor inhibiting economic growth in many Western nations.
In parts of Europe, in particular, bank lending on a tight leash has slowed investment and innovation by companies, especially SMEs, and stifled confidence in employee recruitment.
Whereas, by comparison, in the US more than 15,000 financial institutions lend to SMEs, in the UK, for example, five dominant lenders control about 90% of the market for loans to companies of this size. These high street banks, because of their ambitious lending targets of the ‘glory days’, have been instructed to reduce their balance sheets and lend less.
As a result, SMEs have become less reliant on banks and are looking for other forms of funding, such as asset finance or invoice discounting. Capital is also available from private equity sources. SMEs in the UK, known for their determination to overcome obstacles, are also using their own funds, and funds from friends and family. According to the UK’s Federation of Small Businesses, entrepreneurs are using their own personal credit cards as much as they are using secured lending facilities from banks.
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