By Daniel Hunter

Bank lending to leasing companies has fallen sharply at the start of this year, choking off an important source of funding for small-to-medium sized enterprises (SMEs) struggling to cover the costs of vital business investment, says LPM Outsourcing (LPMO), the leading provider of services to the asset finance sector.

LPMO points to the latest figures from the Bank of England which show that lending by banks to leasing companies dropped 7% since the start of this year — down to £24.3 billion in April compared to £26 billion in December 2012. Such lending had previously remained steady at around £27billion or just over throughout most of 2012 as a whole.

“The drop in lending to leasing companies is part of the bigger picture in which bank lending is still being tightly squeezed generally, particularly to SMEs," Ian Dennis, Business Development Director at LPMO said.

"The problem for SMEs who desperately need to upgrade equipment or invest in growth is that this effectively closes two doors, if they can’t get a loan from their bank and asset finance companies can’t access the resources they need to unlock that business.”

Total bank lending to UK businesses fell by £1.3 billion in May. In addition, new requirements announced by the Bank of England last month will force British banks to raise an extra £13 billion of capital. This could mean reducing the size of their loan books in order to repair their balance sheets.

However, at the same time LPMO says that the recent extension of the government’s flagship Funding for Lending scheme to include lending from banks to financial leasing corporations within its scope is a step in the right direction.

The Funding for Lending scheme was launched in 2012 to boost lending to businesses and households by enabling banks to borrow from the Bank of England at cheaper than market rates. Its scope was expanded in April to counter continued falls in bank lending — total lending by banks taking part in the scheme fell £300million in the first quarter of this year.

“Some major banks are now in the unenviable position of being forced to shrink the amount of debt they hold on their balance sheets whilst simultaneously being expected to lend more to keep the economy going," Ian Dennis said.

“Given these apparent contradictions, the outlook for the UK’s small and medium sized businesses to be able to access the funds they need to survive and thrive still looks cloudy. However, we are cautiously optimistic that the changes to Funding for Lending will finally start to improve the lot of cash-starved SMEs, particularly now that banks are being encouraged to increase their lending via leasing companies.

“Lending to leasing companies rather than direct to SMEs can have its advantages for banks, lowering the potential risks because those leasing companies have the specialist skills and expertise to make accurate and informed credit decisions for whatever field they operate in.

“That’s something that the major banks often just don’t have the resources or deep industry knowledge to be able to do to the same extent.”

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