Do you believe that commercial banks are beginning to lend and do you think Project Merlin will force them to?
Not really. It’s difficult to know exactly how banks will really be able to be forced to lend and in light of tightening criteria from regulation, it’s probable that lending might even remain tighter for longer. I’ll give you an update on the current appetite for banks in a moment but first a run down on ‘Project Merlin’ and why regulation will unintentionally put pressure on banks not to lend.
The four main banks have signed up to a deal called Project Merlin which, along with Santander, will mean that they will make Â£190bn of credit available to businesses in 2011 (Â£11bn more than 2010). Â£76bn will be made available to smaller businesses. Community based projects through David Cameron’s Big Society Bank will benefit from Â£200m from the banks. On top of that, the business growth fund will receive equity capital of Â£1bn over three years. This fund is aimed at assisting small businesses in hard pressed areas of the UK.
I’ll spare you the detail, but banks have agreed to curb bonuses and most importantly, the bank executives’ bonuses will be related to performance targets in relation to their lending.
Each quarter the Bank of England will monitor whether or not funds are being made available by the banks and will publish quarterly assessments. So, all being well we should see some greater lending in this current year. There are no targets as yet for any other year.
In 2010 the G20 leaders endorsed the Basel III requirements on stricter liquidity and capital requirements ensuring banks held more capital as liquidity but also of better quality. There are potential unintended consequences of that: As the supply of money to banks is finite, banks may choose to hold capital back to meet their liquidity requirements. Banks will probably have to issue bonds of longer maturity to meet the new rules, so the cost of funding will/may rise. There are two consequences of this – dented margins at banks or the extra costs handed over to borrowers, a delight they have enjoyed since time began. Much will depend on how the banks respond to this regulation, but it's onerous.
Our commercial lending department have supplied me with the latest update on which banks are more relaxed than others. Although slow, we are seeing banks easing their policy in terms of lending. Not all banks are doing that however.
Natwest and RBS appear to be hibernating at present and whilst they are interested in trading businesses their lending criteria is not that competitive. Santander is very interested in trading businesses and have a clear criteria which is very useful to follow and as a bank are quite useful in a number of circumstances.
Barclays are still trying to get their engine started and really aren’t as competitive as they used to be. HSBC appear to be assisting RBS in squirreling nuts and having a little power nap from lending, whilst Lloyds appear to be enjoying Spring with Santander and are one of the most competitive banks available in the UK at the moment and definitely the most likely to support the ordinary small business debt requirement. Hats off gentlemen.
Most of the above mentioned banks will look at trading businesses, but undoubtedly Santander and Lloyds are the pick of the bunch. There are a few banks who will be happy to assist with residential investment debt as well as some of the larger residential development deals but it’s tight criteria and you will need to ensure you have your proposal well prepared by your business finance broker.
High street banks are very dubious about commercial development unless there is a clearly defined pre-sale or pre-let for the build. Even then there are very strict criteria to be satisfied for the lend to go ahead.
At the large debt end – say above Â£10m, there is evidence to suggest the development and property investment deals are easier to come by. At this point we are normally off the high street and into using more niche lenders with vast experience in this market.
If you have a business finance query or would like some advice call Peter on 0845 230 9876, e-mail firstname.lastname@example.org or take a look at our website.
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Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'