Even though the ‘green shoots’ of recovery sprouted long ago – according to some economists, at least – the recovery in the lending markets remain slow. So what’s going on, and when are we likely to see real recovery?

A background

Before we can really discuss how things are likely to move forward, it’s important to have a proper understanding of what led to the credit crisis, and where we are now.

Before the credit crisis, financial institutions were basically lending money to people from a wide range of backgrounds – some comfortable financially, and some less so. Over time, however, this meant that some people borrowed money that they could not realistically afford to repay, often in the form of mortgages.

In short, there came a point when many people began to default on their debt repayments, with many more on the brink of doing so. Lenders reacted by reducing their lending, in an attempt to protect themselves from further damage.

With time (and a lot of government intervention), most of the banks are now back on relatively steady ground. But the lessons learnt from this crisis mean that lenders are still more cautious about who they lend to.

What next?

Most economists would agree that the wheels are already in motion. Lending levels are on the rise – albeit slowly – but it may be a while before we see anything like the kind of lending seen before the crisis.

Gross ‘consumer credit’ lending, for example, rose from £13.6bn in August 2009 to £14.6bn in August 2010. Back in August 2004, it stood at £18.2bn.

Lenders always have an incentive to lend – making money – but they are currently having to balance that with the continuing uncertainty in the economy. Slowly but surely, it’s likely that lending will increase in the coming months, unless anything else significant happens to damage everyone’s expectations for the economy.

It’s also important to note that lower lending is not all to do with the lenders. Demand is also in relatively short supply, partly due to caution about the economy in general, and partly because fewer people are in the position to consider borrowing money.

As Professor Philip Booth of the Institute of Economic Affairs has already made the following comment much better than I could have put it, I am using his words to explain why:

“Europe is trapped in a cycle where debt is being passed round and round in circles – the banks are bust so the Irish government bails them out; the Irish government’s debt is owned by other banks and if the government defaults, they go bust; the EU as a whole then tries to rescue both in opaque arrangements which are only sustainable because Ireland is so small; now Britain is getting involved.

“Responding to debt crises in this way is entirely unsustainable, we potentially have crises in Italy and Spain around the corner and nobody can shoulder their indebtedness.

“The EU has been sitting around doing very little for the last two years (except for dreaming up new regulations for the banks, hedge funds and private equity). What it and the nation states involved should have been doing is ensuring that banks can be wound up in an orderly fashion so that all providers of capital and credit potentially lose money except for depositors who were insured at the beginning of the crisis. The EU governments are simply underwriting mistakes made by private businesses and then blaming it all on “casino capitalists”.

“The Irish government’s debt position would not, in fact, be that bad if it were not for the bank guarantees. Ireland is not another Greece (or Italy) – its underlying position is sound. The key issue has not changed since the beginning of the crisis – it is the need to recognise failed financial institutions for what they are and not load the cost of their bad loans onto taxpayers in general. At the beginning of the crisis, the bail-outs were understandable; we have now had two years to sort out proper legal mechanisms for winding up banks.”

Like any other bank, if you keep within the rules and guidelines everything is ok, it is odd that it is always people who opt to go overdrawn without having facilities to do so that complain loudest.

My complaint is not with the service or indeed lack off service that the bank may offer, it is the latest string of adverts on TV that have left me bemused.

NatWest have had the fantastic idea of putting branches back on the high street, opening on Saturday mornings and anything else that they hope will get customers through the door.

What I would like to see is an apology from NatWest saying;

We are sorry, we were wrong when we closed down your local high street branches ten years ago, sorry we changed our hours to suit ourselves and not our customers and sorry that we created streams of faceless, clueless fresh out of university business managers with absolutely no experience of real life, let alone business to sell insurance products to our customers from office space on an industrial park.

Whats the chances?

In an article on the BBC news site Knight reiterates the recent findings of the Bank of England’s Trends in Lending report, whose agents across the UK have reported that demand for loans from SME’s remains weak.

Despite UK banks lending as much as £500m to small businesses there are calls from some SME’s and their representatives to make more funds available.

Knight insists that adequate funds are available and that banks are committed to lend to viable businesses, after all the core business of the bank is to make a return for its customers by lending money to sound borrowers.

The report also suggests that similar to personal debt, many companies are attempting to pay off their debts rather than saddle themselves with more.

The crux of the article is that banks are prepared to offer finance at any level providing that the borrower is viable and can demonstrate the means to repay the money.

Historically in the UK  many small businesses have borrowed beyond their means and once saddled with an overdraft facility have simply attempted to increase the borrowing year on year.

This works ok in a normal or booming business climate, but during the financial crisis banks have had to become more aware of their own failings. Constantly increasing business debt to companies that do not have the facilities to reduce the burden is no longer seen as viable business to bankers and rightly so.

It is up to business owners to ensure that they have are viable and not bogged down in debt already before approaching the bank for increased finance.

More so than for many years, business borrowers will need a robust and sustainable plan for repayment of any monies lent to them, before the bank manager is likely to be interested in lending.

The Forum of Private Business claims that business owners are finding it more difficult than ever to access finance and indeed many report that they have had overdraft facilities cut, or withdrawn altogether.

In a separate survey the Federation of Small Businesses found that 25% of its respondents are unhappy with the support they are getting from traditional lenders.

Whatever way you look at it the traditional lenders that were rescued from the financial crisis by the previous government are still refusing to play ball with many small business account holders.

This is not always the fault of the banks of course as many SMEs are primarily sales orientated and will take an order at any cost, even when knowing that they may face a long wait for payment from the customer.

For these businesses collecting outstanding accounts is a secondary consideration that will never receive the same attention as obtaining an order.

There are of course other options to conventional banks when looking to finance the growth of a business and among these are Factoring and Invoice Discounting. Companies offering these services operate only in the business sector and should therefore understand your needs better than some of the more traditional lenders.

Factoring and Invoice Discounting are quite often considered to be same thing, this is not actually true and the basic differences are explained here.

Factoring is a process whereby a business sells its outstanding sales invoices or accounts receivable to a third party (Factor) at a discount, in return for immediate payment. This is a continuous process that ensures a regular cash input into the business each month and reduces the need to chase bad debts.

The Factoring company is then responsible for collection of outstanding accounts by providing a full sales invoice administration coupled with credit control and debt collection service, enabling the business owners to concentrate fully on growing the business.

Alternatively, an Invoice Discounting Company will lend your business money using the sales ledger as collateral, releasing immediate cash against sales on a regular basis.

The business owners retain full control of the sales ledger and remain responsible for the collection of outstanding accounts.

This article is intended as a very basic guide to Factoring and Invoice Discounting versus conventional banking in the UK for SME Businesses. Services in this sector are tailored to suit individual companies and anyone looking for alternative funding for their business should seek advice from the experts in this field.

The research shows that over 50% of credit card holders for instance have not reviewed their monthly payments or balance in the last year.

That figure raises to 82% for people who have overdrafts and 86% for those with personal loans, showing that generally once provision is in place the majority of us do not bother taking steps to control our outgoings.

The study reveals that people are not taking proactive steps to ensure they stay on top of their money – 53% of consumers have never checked their credit rating, despite it being possible to do this for free, and I have to admit to being among them.

And one in five (21%) are unaware that missing a credit repayment can harm their credit score with 25% believing that ignoring a County Court Judgment will not affect their ability to access credit.

Dr Jonathan Henderson, consumer psychologist sees this “as a classic manifestation of the ‘ostrich syndrome’, where people choose an out of sight, out of mind approach to their finances where the less you know, the less there is to worry about.  Often people kid themselves they’re in good financial shape but in reality it’s a different story, which is only revealed when bigger problems occur further down the line.”

For years we have campaigned for plain speaking jargon from financial institutions and now Capital One have taken it upon themselves to offer practical financial education advice.

To help consumers improve their financial management Capital One has launched its ‘Credit Made Clearer’ campaign, which features a series of short animated films explaining in an easy to understand format the key area of finance that affect us all.

The campaign is designed to offer helpful money management while also dispelling the myths and confusion that are ingrained in the world of credit and finance through a series of easy to follow and understand animated films.

Commenting on the new campaign Brian Cole, Managing Director, Capital One said: “It is encouraging that consumers believe they are on top of their finances but perhaps they need more support in order to ensure they do not make avoidable mistakes.  We hope that our approach, which combines animation and humour, will help more people to think about their finances and take simple positive steps to improve them.”

For more information visit the Capital One ‘Credit made clearer’ campaign and watch the series of video clips with helpful and easy to understand financial tips and information.

Britain’s first new high street banking group since the 19th century will open its doors on Thursday promising a return to traditional banking practises from its ultra modern premises.

The flagship branch is the first of twelve planned openings across Greater London during the next two years, with premises in Borehamwood and Fulham Broadway already being fitted out in readiness for October launches.

Despite the promise of traditional banking values, Metro Bank opening hours are straight out of the 21st century and the branches will open at 8am until late and also at weekends.

John Wriglesworth, Moneyexpert and Immediate Financial, comments:

“Metro Bank’s launch is excellent news for the retail financial services sector as well as ordinary consumers.    People will be given more choice on the high street and we should see additional competitive deals which will spur other banks and building societies into offering similar – and potentially even better – products.   The banking sector – which has been shaken over the last couple of years – will also take heart from a new entrant with ambitious plans for the future.”

“The deficit reduction programme takes precedence over any of the other measures in this agreement, and the speed of implementation of any measures that have a cost to the public finances will depend on decisions to be made in the Comprehensive Spending Review. We will significantly accelerate the reduction of the structural deficit over the course of a parliament, with the main burden of deficit reduction borne by reduced spending rather than increased taxes.”

Chancellor George Osborne, who has announced an emergency budget for June 22nd, said he would outline plans on Monday for an initial £6 billion’s worth of cuts.

The coalition has plans to cut Ministry of Defence spending by 25%, while proposing private capital investment in the Royal Mail.

The Accord supports the introduction of a banking levy and the reduction of the bonus culture in the finance sector. Meanwhile it will be interesting to see if the coalition can succeed where the Labour government failed, in getting banks to lend money to businesses.

“There is an urgent priority that is getting lending going to small- and medium-sized businesses. That is an absolute urgent priority,” said Osborne.

The IEA are particularly at odds with the Conservative party over the issue, David Cameron’s party have not only shown support for the idea emanating from France and Germany, but also believes that the UK should take the lead in implementing the levy.

Indeed the idea has the backing of all the UK parties and given the situation that the financial crisis has caused to the general public the bank levy will also appeal to most of the electorate.

The average man on the street would love to see banks in the UK operating under stricter governance and guidelines, but the IEA point out that this is not necessarily the best move and the benefits from adopting such a policy are far outweighed by the drawbacks.

Mark Littlewood said;

“Britain needs to decide whether we want an economic recovery or not. If we do then we need to realise that it will only happen if we value the finance that supports private sector growth. The call from France and Germany to introduce an international levy on banks is hardly a positive step in trying to rebuild Europe’s fragile economies. There has been support for this idea from all parties, with the Conservatives even going so far as to suggest that Britain should lead on it, but the cost of the tax to Britain will be far higher than the benefit.

We’ve seen our politicians intervening to try and ‘stimulate’ a recovery, but more important is the kind of culture we create. If we want Britain to become a place that thrives with commercial activity then we need to be seen as a place that values commercial activity, a levy on bankers’ bonuses, discussion of a Tobin tax and now a proposed levy on bank assets all contribute to the message that we don’t want to be the financial hub of Europe and that we do not value cheap, efficient finance for consumers and firms. It’s time we changed our tune.”

virgin to bid for rbs

The Daily Express has reported that Virgin Money have secured the financial backing required to launch a bid for the British banking assets of 320 Royal Bank of Scotland (RBS) branches, as the company seeks to increase it’s foothold in the retail banking market.

Virgin Money will face stiff competition for the RBS business as other suitors looking at the branches for sale include Spain’s Santander, who are looking to increase their own share of the UK market and the National Australia Bank.

Virgin are reported to have lined up financial backing for their bid through Abu Dhabi based sovereign wealth funds and the private equity company Blackstone.

Virgin may have the funds sorted but their experience in the banking market is still in it’s early stages, having entered into the business earlier this year with the purchase of  Church House Trust in a £50 million deal.

This should not be held against them in the RBS bid as Virgin have shown time and time again that they are able to learn the market quickly and have become market leaders in most of their chosen business investments.