As chances for bank loans shrink, Britain’s small firms struggle

It’s as if someone is “holding your throat and choking you slowly.”

That’s how one analyst vividly describes the squeeze on lending in Europe these days. Scared by the euro debt crisis and a flat-lining economy, banks have been tightfisted with their money, refusing to issue many of the loans that companies desperately need to keep their operations running smoothly or to take them to the next level.

That has added to concern that the world may be heading for another credit crunch hard on the heels of the last one, which was triggered by the 2008 financial crisis and helped tip the global economy into recession.

Here in Britain, Prime Minister David Cameron’s office reckons that banks have already entered a second ice age. In other parts of Europe, especially the weakest of the 17 nations that share the euro, credit has also begun freezing up, analysts say.

The squeeze has sent businesses scrambling for new ways to finance their activities and fostered an alternative market that bypasses Britain’s big “high street” banks in favor of lending houses and venture capitalists.

Among the innovators is the online lending site Funding Circle, which is sort of an EBay of commercial lending. Creditors specify the amount they’re willing to put up, and at what interest rate, in a loan auction for companies in need of the money. The overall loan is pieced together from the best bids, sometimes dozens of them, many of which are submitted by individuals who invest as little as $30.

After little more than a year in operation, Funding Circle facilitated loans worth more than $5 million in November, including $1.6 million within a single week. Businesses usually receive the money within a couple of weeks, compared with the three to six months it can take a bank to process an application.

“We knew that small businesses, even good-quality small businesses, would be underserved” by mainstream financial institutions, said Andrew Mullinger, one of the website’s founders. “They don’t have the clout of the big companies and couldn’t demand services.”

Gerard Oates’ company, Arcadia, sells bulbs and fittings for aquariums and vivariums. Not long ago, he hit on a bright idea for a lamp using cutting-edge technology, which he shopped around to various banks for the financing to develop it.

Every one rebuffed him.

“We needed money, and it wasn’t there,” Oates said, recalling the frustration of repeated rejections. “We had all these product ideas and not the wherewithal to realize them.”

He was “absolutely in shock” when he discovered that he could draw his $118,000 loan less than a week after his request appeared on Funding Circle.

Arcadia’s new 30-watt lamp debuted in December to better-than-expected sales, and is on track to become “the most successful product we’ve ever had,” Oates said.

But plenty of companies haven’t been so lucky in their quest for financing. And in a worrisome sign, many of Europe’s banks have curtailed lending not just to private companies and individuals but to each other, constricting the flow of money that lubricates market economies and keeps them humming.

Last month, the European Central Bank surprised many economists with its announcement that it would be doling out a record amount of money in special low-interest three-year loans to the region’s struggling financial institutions. More than 500 banks signed up to borrow a staggering $640 billion, evidence that many are having trouble drumming up cash.

The hope is that they’ll hand out some of their new funds from the ECB as commercial loans and buy up bonds of financially troubled nations such as Italy and Spain. But economists say it’s also likely that many banks will hoard the extra money to beef up their reserves in the event of an emergency.

That would be bad news for business owners whose own reserves are running low and who need the banks to help tide them over, for example, shopkeepers who traditionally require a boost through lean winter months.

“There were savings that were accumulated over time which were able to fill in for some of the loss of access to credit,” said Sony Kapoor of the think tank Re-Define.

But with those savings close to tapped out, “we are going to see a very serious problem,” Kapoor said. “We’re going to see a contraction of the exact part of the economy — small and medium-sized enterprises — that are most useful to generating growth.”

Plenty of analysts are predicting a double-dip recession for Europe, which has so far failed to tame its roiling debt crisis. A second credit crunch, on top of harsh government spending cuts and painful structural reforms throughout the region, would drag down the European economy even further and make recovery a more distant prospect. The effects of that would ripple out to the rest of the world.

In a survey published by the ECB last month, small and medium-sized businesses in the Eurozone reported a marked deterioration in their access to bank financing from April through September last year.

About one-third of those that had requested loans said their applications were rejected in whole or in part. More than half complained that the interest rates they were being charged had gone up.

For all the businesses surveyed, the tough funding climate ranked as their second most pressing problem, after the difficulty of finding customers.

The outlook is equally gloomy here in Britain, though it doesn’t use the euro and the government has tried to cajole banks to open their credit taps.

In a poll in October, the Federation of Small Businesses found that a third of its members that had tried to borrow money in the previous two months were turned down.

“There are a huge number of businesses that are being outright refused,” said Sara Lee, a spokeswoman for the organization. “They kind of now think they’ve missed their growth opportunities, the chance to invest in their business. They can’t now grow their business, they can’t take on more staff, and that has a wider impact on the economy.”

The funding freeze is largely caused by the reluctance to lend on the part of Britain’s mainstream banks, such as Barclays and Lloyds. Just five of the big banks account for 85% of the credit extended to small and medium-sized firms, which can’t issue bonds or go directly to financing markets the way big businesses can.

Oates, the aquarium-lighting specialist, is now disenchanted with the traditional banking system, which seems like a fair-weather friend.

“They’ll give you an umbrella when the sun is shining, then take it back when you need it,” said Oates, whose company is based here in Redhill in southern England, just outside London.

The banks’ growing aversion to financing modest firms such as Arcadia, which employs 33 people and has an annual turnover of about $9.4 million, is robbing the economy of growth exactly when Britain needs it most.

“We’re the ones that’re going to create jobs,” Oates said. “The banks are responsible to their shareholders for making money. They’re not responsible for acting in the good of the country.”

henry.chu@latimes.com