Access to finance - 2011 is a big year | EEF

Access to finance - 2011 is a big year

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2011 is shaping as a crunch year for access to finance. It's not so much that there's any bone-shatteringly bad news (in fact that's mixed with our own recent survey suggesting a mild improvement; other sources less optimistic). Rather the slow progress in resolving issues for particularly small firms accessing the finance they need to grow risks being a major hangover in 2012.

That's a big reason why access to finance is one of the forces we are watching in 2011 and is given some attention in a report we're releasing on Monday Economic Prospects 2011.

In 2012 several new forces will run against the freeing up of the flow of finance. The Telegraph today highlighted how banks are already adjusting their behaviour in anticipation of new regulatory requirements under Basel III, coming into force from 2012. This is the need for banks to hold a higher level of core capital against the loans they put out, an important part of stabilising the system against financial shocks.

According the Bank of England, banks are also already reporting tough conditions refinancing themselves on wholesale funding markets. Difficulties they have in accessing funds, or the higher prices they may have to pay, will flow through into what they in turn charge for loans they issue. 2012 is again key because a large volume of banks' funding is due to be refinanced in that year.

And of course, 2012, all going well, firms will be increasing their investments and so demand for finance will be higher. It would be a cruel blow to growth if this investment were stifled by problems accessing finance.

So that points to the importance of 2011 in taking those actions that can make a difference to help offset the challenges of 2012.

The banks and government have already made some commitments late last year. But these aren't enough. We need to see further and faster progress on increasing competition in the finance sector – both within and outside banks. Debt finance is especially important to small firm owners who don't want to lose equity stakes in businesses they've worked hard to grow.

Viable proposals are still being knocked back following the financial crisis because banks' appetite for risk has fallen and the high-leverage, high return years of debt finance have choked off options outside banks. We need a renewed appreciation of the importance of banks' relationships with their customers – an injection of real business understanding would help. Let's see banks building their expertise on industries and firms themselves rather than relying solely on conservative lending formulae.

On the demand side too, smaller businesses need a stronger understanding of and willingness to consider alternative finance options. And where firms may require help in understanding and assessing these options cost-effectively there may be a role for government.

The government's first opportunity to show some resolve is at the Budget in March; 2011 needs some action to get ahead of the curve.


Media Team 020 7654 1576

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