A quiet crash in big bank lending?

Small business lending by the big banks falls off a cliff from December to January.

Net loans to small businesses by the largest UK banks fell by a hefty £536m from December to January, according to the latest statistics from the Bank of England. It’s by far the biggest retrenchment in SME lending in the past two years, which is as far back as the data set stretches.

Gross lending by the banks in question fell further still, nosediving from approximately £5.1bn in December to £4.05bn in January. The figure for January is, again, by some distance the lowest figure for monthly gross lending by the banks to SMEs over the past two years.

At a glance, this does not look to be the result of seasonality. January of last year saw net loans to SMEs by the banks in question come in at a positive £236m.  

Brexit may well lie at the root of the problem. It’s no secret that the banks have been pulling back from certain segments of the small business lending space since the UK’s vote to leave the European Union, but the January drop-off is by far the sharpest we’ve seen.

It would suggest that the government’s Funding for Lending Scheme (FLS), which exists to incentivise incumbent lenders to lend to small businesses, may not be enough to get the banks lending to SMEs during more uncertain economic times.

Funding Circle, the world’s largest marketplace lending firm for small businesses, lent £103m in January (£50m net). Meanwhile the peer-to-peer lending sector as a whole lent £208m during that same period, according to AltFi Data. There are then a raft of balance-sheet based alternative lenders, which are also lending millions of pounds to SMEs each month. 

One such lender, Nucleus Finance, has seen a marked increase in lending opportunities in the immediate aftermath of Brexit.

"We are aware of certain approaches [to banks from SMEs] being declined on the back of Brexit," said Dennis Pym, finance sales director at Nucleus. "If anything, this time of change will push SMEs to look beyond traditional channels to secure funding. For alternative providers, it’s an opportunity to step in and help these businesses achieve their growth targets with competitive financial solutions.”

Conrad Ford, CEO of loan referral platform Funding Options, says demand for credit among SMEs is unchanged.

"We did see a slow start to the year after the Christmas break," he said. "It was approaching midway into January before volumes picked up, where usually this would happen in the first full working week. But since then we've seen pretty consistent momentum which I think suggests the demand is still out there."