Stick, Carrot or Mouse?

Banks in the UK made the news again this week for not meeting small business lending targets. A £2 billion shortfall was estimated for Project Merlin, the deal struck between the UK Government and five big UK banks. The deal, which is yet to demonstrate the outcomes desired, was not without critics and various calls for stronger measures. Linking bonuses, levying taxes, and other ‘sticks’ have been proposed around in the hope of forcing banks to lend.

While the measures suggested across the Atlantic may have a different tone, an earlier article cites the conclusion as “complex and multifaceted”.  Figures contained suggest that while small business lending volumes in the US have dropped, so has overall bank lending.

Notwithstanding incentives, punitive measures or other ‘encouragement’,  small business financing still remains a matter of concern. In a previous blog post I questioned whether forcing banks to lend would make a meaningful dent in the small business financing conundrum.

Whilst policy measures and political agendas will continue to unfold, I think we could be better off focusing efforts on seeking creative solutions to make the commercial finance raising process easier for small businesses, while simultaneously getting a grip on what issues face the supply side.

Give banks more money to lend? Increased liquidity could drive down lending spreads, but that is a function of the wholesale funding markets. Relax bank lending criteria? We tried that and 2007 and 2008 reflected what happens when risk runs away with the rules. Subsidized lending, grants, guarantees? The SBA and EFG facilities continue to be available in the US and UK respectively. It could be that the delivery of these facilities could be improved, or for that matter, simplification of criteria and process.

There have been calls to further nationalize banks, or force bailed out banks to lend more. This is hard to do: development or enterprise banks are able to fulfil a key role in providing growth capital, but they also need to balance policy targets against credit risk, cost (and availability) of funding and of course, sustainability (profitability). Allocate more people to business banking? Some banks are expanding their origination and relationship teams, although this will vary by lender and region.

Borrower education? Small businesses could benefit from a better understanding of their financing options. Asset based lending works well in a constrained credit environment, but does not appear to have managed to dislodge term facilities, overdrafts and credit card debt. Disclosure and better information provided by businesses? Yes. Banks need a fair amount of supporting information, and small businesses often find this hard to provide, especially when shopping around.

Technology? Definitely. Efficiency, transformation, richer data – if premised on a good understanding of the problem to be solved, all can be delivered by the right technology based model.

I believe that a number of technology solutions (or part-solutions) will be introduced into the market by existing players as well as disruption-touting start-up’s. If businesses, lenders and corporates are open to try new approaches, a solution to improve the situation could be closer than we think.