Big banks miss Project Merlin lending targets

Britain’s top five banks have missed their lending targets for small business by more than £1bn, according to figures.

Lloyds Banking Group, Royal Bank of Scotland, Santander, Barclays and HSBC agreed to increase lending available to SMEs by £76bn this year under the Project Merlin deal with the government.

But overall lending shrank in every quarter last year, while it fell by three per cent in the final three months of 2011 after taking loan repayments into account, the Bank of England said. However, while the banks missed gross lending targets for small business last year, they beat the target for all businesses by £24.9bn.

Royal Bank of Scotland was the main culprit for the shortfall in lending to small businesses, after the other four banks announced they had exceeded their own targets.

The Project Merlin lending figures come as a survey from the Federation of Small Businesses (FSB) revealed the number of small businesses that have used a bank loan or overdraft has fallen in the past two years. Only 35 per cent of the organisation’s members used an overdraft in 2011 and just 11 per cent took up a bank loan.

FSB London senior development manager Matthew Jaffa said he expected the national outlook to be reflected across the capital.

“Many of our members actually say they are not even going to the bank in the first instance because they know what the answer is going to be,” said Jaffa.

A third of respondents to the FSB’s survey said they had used their own savings or inheritance to fund their business.

“A lot of members are saying they are dipping into their savings or even inheritance to fund their business. It’s a problem for new businesses between one and two years old, and especially those that are just starting up. They are finding it most difficult to access finance.”

Jaffa called for more competition among the banks on London’s high streets, along with alternative finance sources to loans and overdrafts such as invoice discounts and supply chain finance.

“Banks really need to understand businesses before they talk to them, cash flow is key. For the majority of businesses, bank managers are changing from time to time, whereas in the old days you would have a bank manager who would work with businesses for years and nurture them.

“It is about training the bank managers and getting them to understand the mindset of small businesses - the fact you are living on a knife-edge and being entrepreneurial.”

Jaffa said bank managers could get a better understanding of how SMEs work by spending some time in a small business.

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