“Credit where credit’s due”

The key chart

A snapshot on SME lending in the UK

In recent posts, I highlighted the widening financing gap between large corporates and SMEs in the UK and concerns that SMEs in the euro area were expecting the availability of external funding to deteriorate sharply.

This week’s “Money and Credit” release from the Bank of England brings some welcome, positive relief to this negative narrative. SMEs in the UK borrowed an extra £18bn from banks in May 2020. To put this into context, the previous largest increase in SME net borrowing was £589mn in September 2016. The Bank of England noted that this increase (11.8% YoY) “reflects businesses drawing down loans arranged through the government supported schemes such as the Bounce Back Loan Scheme”.

These schemes helped reduce the effective interest rate on new loans to 0.98%, which is the lowest rate paid by SMEs since 2016 and compares very favourably with the 3.44% charged on new loans in February 2020.

SMEs play a vital role in the UK economy. They account for 50% of total revenues generated by UK business and employ 44% of the UK’s workforce (McKinsey, June 2020). Up until this month, there were obvious concerns that limited access to funding and its relatively high cost were adding to the pressure of sharp revenue declines.

The large scale and lower cost of SME funding indicated in this week’s data release is a welcome, positive change in the message from the UK money sector.

Please note that these summary comments are extracts from more detailed analysis that is available separately