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Big banks hike small business lending for first time in nearly two years as UK economy improves

High street banks have faced criticism for hamstringing growth among SMEs with "harsh" lending practices.
High street banks have faced criticism for hamstringing growth among SMEs with "harsh" lending practices.

Big banks’ lending to UK small and medium-sized enterprises (SMEs) has seen its first notable rise for almost two years, according to quarterly data, amid an improving outlook for the domestic economy.

Gross SME lending rose 15 per cent during the first three months of 2024, the first significant increase since the second quarter of 2022, according to data reported by high street banks to trade body UK Finance. Lending was broadly flat in the previous quarter, rising just one per cent.

However, lending of just over £4bn in the first quarter reached its highest level since the end of 2022 and was eight per cent more than the same period last year.

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Big banks have come under pressure to increase their appetite for SME funding after criticism from politicians. The influential Treasury Committee last month accused the industry of hamstringing growth by making access to borrowing more difficult.

The majority of small business lending now comes from outside the big banks, according to UK Finance, as SMEs flock to alternative providers.

New SME finance approvals among high street banks jumped 27 per cent during the first quarter of this year to their highest level since the start of 2022. The value of approved finance also rose 10 per cent.

The data points to small firms’ rising demand for borrowing amid a more positive outlook for the UK economy. With inflation edging closer to the government’s two per cent target in recent months, the Bank of England is expected to start cutting interest rates in August or September.

Although figures published last month showed the economy officially came out of a shallow recession in March, it was stagnant in April and affordability pressures continue to weigh on small firms.

SMEs continued to reduce their stock of cash deposits at the start of 2024, falling 4.5 per cent to £223bn. Depsosits peaked at just over £270bn during the Covid-19 pandemic.

Still, UK Finance said small firms retained a “signifcant savings buffer”, which remained more than 10 per cent higher compared to pre-pandemic levels.

SME finance repayments remained stable in the first quarter. While repayments among manufacturers and SMEs in transport, storage and communications have fallen in recent quarters, accommodation and food services have seen increases, particularly in the first quarter of 2024.

“It is encouraging to see further signs that SME demand for finance is returning,” said David Raw, managing director of commercial finance at UK Finance.

“As the economic outlook for SMEs improves, the financial services sector is helping businesses across the UK. Lenders remain ready to ready to support SMEs who need and can afford finance.”