By Marcus Leach

Members of the UK200Group have reacted to the news that the Bank of England have confirmed a £2.2 billion shortfall in lending to small to medium businesses (SMEs) as part of Project Merlin.

Vince Cable says he wants a "significant improvement" to banks' lending and that they have the remainder of the year to make up for their shortfall.

“It remains evident that the fundamental issues for businesses regarding access to finance are not the lack of availability to good business propositions, it is one of pricing and conditions. Many businesses that are confident on the outlook for their business are not approaching their banks for more funding simply because the margins they are being offered, the conditions attached i.e. security requirements (such as personal guarantees) and heavy covenants are unattractive," Spencer Wright, chief executive, Dains LLP said.

“Businesses understand that the days of cheap bank debt are over, however, there is a perception that most banks are loading the cost onto businesses in order to quickly repair their balance sheets. The difference between what banks are prepared to offer and what good business are sensibly prepared to accept will feed through into lack of investment, lower rates of job creation and contribute to a longer period of recovery than might otherwise be expected.

“A combination of the extension of a clarified Small Firm Loan Guarantee Scheme and either a cap or subsidies on lending margins may be money well spent by the government as they seek to drive a private sector business led recovery.”

Jonathan Russell, partner, ReesRussell said:

“Banks failing to meet target lending to smaller businesses is no surprise to anyone advising such businesses. In part it may be that the banks are not even being asked because their entire structure is unfriendly to small businesses. We are also seeing banks refuse what appear to be very sound propositions even when backed by security.

“On the other side we are seeing successful small businesses being pressed to reduce borrowings which are placing them in a weaker position to take up opportunities when they arise. In particular we are seeing difficulties with very small businesses and start-up propositions.”

David Ingall of JWPCreers:

“Banks cannot be expected to change direction suddenly at the whim of politicians. Let us not forget that they were accused of creating the credit crunch by irresponsible lending. Additionally, the new rules imposed on them about lending and their own capital requirements will make them overcautious. Having said that, the banks have got to somehow ease the position for SME’s, however, greater imagination does need to be exercised by both the banks and in government circles.

“Banks do need to look at whether they can do some ‘faith’ lending, which is when a business is basically good but a further loan might not be entirely justified. These loans would probably be at the smaller end where their most vociferous critics are, probably because of their greater numbers.

“In government circles a review should be undertaken to see whether the new regulatory system is restricting lending and whether some correction is needed to the rules. Inevitably bureaucrats will have used the sledgehammer principal in those rules to cover themselves. But isn’t that always the way?”