Banks now claim that they lend to 80% of small businesses asking for loans, but Vince Cable the coalition Business Secretary says this assertion is misleading and that banks are actually making it more difficult for SMEs to get credit.

Reported in the Telegraph Mr Cable said "This is misleading. I think they are raising the hurdle. All the evidence from business, from the Institute of Directors and other bodies, is that banks are not lending as much as is needed."

Latest statistics from the BBA show that the banks lent out less in May than they collected from debt repayments and reduced overdrafts.

This move by Cable comes ahead of a Treasury consultation exercise discussing ways of improving the flow of finance. The consultation will also look at whether forcing banks to lend via a system of targets would be beneficial, but this approach has already failed under the last government.

According to the Telegraph the government are looking at different ways of funding small businesses such as covered bonds, private investors, tax incentives, more use of the 3i model and possibly even local stock exchanges. "The system is still biased towards debt and we need to find ways of getting more equity funding into business, maybe through something like the old 3i, to help growth with tax breaks or tax incentives without it being a way of avoiding paying tax," Vince said.

The banks, once berated for being too cavalier, were forced to re-evaluate their methods as a result of the credit crunch. Government then imposed higher capital requirements on them to make them ‘safer’. Now we need them to lend again. A bank’s job is to take money and lend it out at a profit on a fractional reserve basis. If they do not use the money they make a loss on it. But it is the banks job to determine the risk and who to lend to. By forcing banks to lend you force risk on them, which leads inevitable to defaults and bad debt (again).

Unconsidered lending got us here and it will not get us out, it will make it worse. Equity funding as opposed to debt funding may be an option, but it all depends on how much risk the investor(s) are willing to take and how attractive that deal looks to the entrepreneur. If it’s too risky for a bank ……….. ?

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