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Concern as lending to firms falls back by £2.4bn

MORE than half of Scottish businesses which plan to seek funding for growth in the next 12 months are worried their bank will turn them down, a survey has shown.

This finding, from financial services company Close Brothers' latest quarterly barometer, was published yesterday as figures from the Bank of England showed a net fall of £2.4 billion in lending to non-financial businesses in the UK in April. This included a net fall of £629 million in lending to UK small and medium-sized enterprises outside the financial sector. This net basis takes into account repayments of loans.

Asked about the latest Bank of England lending figures, Colin Borland, head of external affairs for the Federation of Small Businesses in Scotland, highlighted the dampening impact of the state of the economy on demand for funding but also highlighted firms' trust issues with banks.

He said: "There are obviously still issues around demand. Some of that is about the economy. Some of it is going to be about trust issues, which still persist six years past the crash."

However, looking for encouraging signs, he added: "We are seeing members more interested in making capital investments now, which we would hope would certainly increase demand [for funding]. You can't get all of that through retained profits. You hope that is going to be met by a positive response [from banks] when they [firms] make that approach."

Mr Borland noted banks presented the FSB with positive figures about the amount of money going out of the door in lending, and he acknowledged the situation was getting better.

However, he added: "The question is, 'Where is that money going?'. Is it going to people who have been deemed a dead cert, or going to that part of the broader economy where I think our members would say there is still an issue about availability."

The survey from Close Brothers found two-fifths of businesses in Scotland plan to seek funding for growth in the next 12 months. Touching on the finding that more than half of these firms are worried they would be turned down for bank funding, Mike Randall, chief executive of Close Brothers' asset finance operation, said: "It is encouraging that many firms are planning for growth and seeking investment, but unless they can get access to funding it will be difficult to realise their ambitions."

He added: "Our research found that 11% of firms surveyed in Scotland have been declined access to bank funding over the last six months, so the fears businesses have are not unfounded."

The Bank of England noted the £2.4 billion net fall in lending to non-financial businesses in April was sharper than the average monthly drop of £2 billion over the previous six months.

It followed a £2.5 billion net fall in March.

And it highlighted the fact that the £629 million drop in net lending to small and medium-sized enterprises, outside the financial sector, was greater than the average monthly fall of £400 million over the previous six months. Lending to SMEs had plunged by a net £1.1 billion in March.

Howard Archer, chief UK economist at consultancy IHS Global Insight, said: "The Bank of England reported that net lending to non-financial companies disappointingly not only continued to fall in April but did so at a sharp rate."

He added: "For whatever reason, increased credit availability to firms is not yet translating into rising net lending. The Bank of England's Monetary Policy Committee acknowledged in their May minutes that net bank lending to companies had been weaker than expected, even allowing for some of the weakness being due to some banks reducing their exposure to the commercial real estate sector in order to improve their balance sheets."He noted the Bank's agents had reported that, while demand for credit had increased, "it remained sluggish, especially among small and medium-sized enterprises, as trust in banking relationships remained weak".

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