Business lending sees record drop

19 June 2009

Many firms are still experiencing the effects of the credit crunch, with business lending suffering its biggest drop in nine years.

The Bank of England’s quarterly review of lending trends found that businesses are meeting continuing difficulties when it comes to sourcing bank finance, and that they are often paying more for the borrowing that they are able to secure.

According to the Bank of England report, lending to businesses slumped to £7.9 billion in May, down from £12.6 billion in March.

The concern is that the lack of working capital will lead to yet more firms laying off workers or going out of business altogether.

Eight out of ten firms included in the Bank’s survey reported that lending had become scarcer and more expensive over the past year. Of those businesses that have encountered a squeeze on credit, two-thirds said that they responded by cutting back on investment.

Many firms are also choosing to focus on reducing the amount of debt they are carrying.

“Lenders report that demand for new credit continues to be constrained by weak investment intentions and businesses’ desire to reduce debt levels,” the Bank’s report said.

Others have had to renegotiate existing borrowing facilities, agreeing to shorter-term and sometimes more costly credit.

The Bank added that a number of businesses have sought to enter early refinancing agreements: “For the borrower, the agreements provide certainty of future funding so that their auditors are in a better position to make appropriate assurances about the company’s future viability.”