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Small firm fears as loan approval rate fall is forecast

UK banks' predictions that the overall approval rate for loan applications from small businesses will fall in the third quarter have been described as "concerning".

The Federation of Small Businesses in Scotland expressed its worries after banks' expectations of a fall in the proportion of loan approvals for firms of this size were revealed yesterday with publication of the Bank of England's latest quarterly credit conditions survey.

The Bank survey shows the loan approval rate for small firms edged up in the second quarter. But banks are signalling the expected fall in the third quarter will be sharper than the rise seen in the latest three months.

Colin Borland, head of external affairs for the Federation of Small Businesses in Scotland, said of the anticipated fall in loan approval rates for small businesses in the coming quarter: "That would be concerning. We would be worried about the message that would send out to people who were thinking about investing. The one thing we do know is people are more likely to have some sort of capital investment [planned] this year."

Mr Borland also noted that the expectation of a fall in the approval rate for loan applications from small firms suggested the decline in lending to businesses was not entirely, as the banks tended to assert, the result of subdued demand.

He said: "It is an interesting one, because we are constantly told it is an issue with demand and, if only people would come forward with their solid propositions, banks are keen to lend.

"Now, if for whatever reason they are expecting approval rates to fall, that would suggest that the issue is not just to do with suppressed demand - it is to do with how banks feel about the current lending climate or the propositions that are being brought to them."

Howard Archer, chief UK economist at consultancy IHS Global Insight, described the anticipated fall in approval rates for loan applications from small firms as "slightly worrying".

The Federation of Small Businesses's latest quarterly survey, published yesterday, shows, while the affordability and availability of credit for member firms in the second quarter was significantly better than a year earlier, it was little changed from the preceding three months. The survey shows 13 per cent of small businesses in Scotland rate the ­availability of credit as "good." And 23 per cent consider credit to be affordable.

Mr Borland said: "The latest figures from our members show that the position has remained almost static this quarter compared with the previous quarter."

But he noted the proportion of firms considering credit availability to be good and loans to be affordable were significantly higher than this time last year.

He added: "Overall, things are better (but) the steady quarterly improvement we had seen in recent quarters seems to have flatlined in the second quarter of this year."

Recent Bank of England figures showed a net fall of £629million in lending by banks to UK small and medium-sized businesses outwith the financial sector in April. These figures take into account repayments.

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