Beware: the lending freeze is coming

Bill Jamieson says there are growing reports of bank facilities for companies being tightened or withdrawn

Central to concern over the credit crisis in recent months has been the potential impact on business and the real world economy. But assessment of the effects on the business sector has been almost completely overshadowed by the near panic over the sharp contraction in mortgage lending and the impact on the level of house prices.

Yet business lending is the vital fuel that supplies finance not only for the grand battleships of the FTSE 100 but also for the vast flotilla of small and medium-sized businesses across the UK. Political concern over the ‘plight of first-time buyers’ looks to have taken precedence over the equally apprehensive small and medium-sized businesses whose payroll and survival prospects critically depend on the bank not demanding back the umbrella as it starts to rain.

So is there a looming credit crunch for the business sector? Banks will insist there is never a shortage of loan finance ‘for the right proposition’ and that business customers have little to fear. Funds will be available for investment and expansion. But there are growing reports – best treated as apocryphal though some swear them to be true – of bank facilities for businesses being withdrawn or tightened; of overdraft limits being cut and banks being much slower and more rigorous in processing loan facilities for businesses.

In truth, lending applications are profoundly influenced not only by the supply of credit but also by the level of business confidence. Plunging business confidence – often a direct reflection of the headlines in the business sections of newspapers when the polls are being conducted – can result in business investment plans being shelved before any loan application is put forward. Many businesses may choose not to proceed because of uncertainty over the likely revenue gains of any expansion, particularly when consumer spending looks under pressure. Battening down the hatches is a common business response as the economy turns down.

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