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Lending ‘monopoly’ is hitting smaller firms

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Mergers between big financial high street institutions and government measures aimed at stimulating lending amongst the larger banks in the aftermath of the credit crunch are having the effect of suffocating competition and limiting the choices of finance open to small firms, it has been claimed.

The Federation of Small Businesses (FSB) argued that, as a consequence, many business owners have nowhere to turn if they are refused credit by the major high street lenders.

With a quarter of small firms still struggling to access affordable finance, the FSB believes the situation is now serious enough to warrant a challenge to the power of the financial sector in order to guarantee a fair service for small firms.

To balance the loss of competition, the FSB has proposed a series of alternative sources of funding and lending on which small firms can draw.

These include restructuring Regional Development Agencies so that they can offer loans as well as funds allocated by the Enterprise Finance Guarantee and the European Investment Bank; turning the Post Office into Post Bank, operating either as a solely state owned bank or as mutual or trustee bank; and promoting Financial Intermediaries, recently created by the government, to viable small businesses that are unable to access finance.

John Wright, national chairman of the FSB, said: “As the second anniversary of the credit crunch approaches, it is important to consider the impact of the banking crisis and what it means for future relationships with small businesses.

“Despite government bailouts and interest rates set at a record low, small firms are still finding it tough to access affordable loans and overdrafts from banks. This is compounded by the fact that much of the support provided by the government is only available through the banks, and often this isn’t replicated at branch level.”

Mr Wright added: “The FSB would like to see more alternative sources of finance provided locally such as through Regional Development Agencies, local councils or post offices. This would increase the choice of finance on offer to business owners, strengthening their prospects of survival and helping them play their part in stimulating the economy.”

One reason for the contraction in the lending market is that a number of overseas-based lenders retreated from the UK following the credit crunch, so reducing overall the sources available for loans.

In the US, private equity firms have invested in finance companies with the ambition of transforming themselves into major lenders. Similar strategies have been mooted by private equity firms in the UK, but investment has until now been limited.

The major high street banks continue to reassure small businesses that they are ready to lend and have countered claims that they are making loans more expensive by charging higher fees and interest rates.