UK businesses step in to plug bank loan gap

LONDON: British businesses are being increasingly forced to borrow from their own suppliers to make good a shortage of bank loans, a survey said, highlighting the limited success of government efforts to boost bank lending.

The major UK banks such as Lloyds, Barclays, HSBC and Royal Bank of Scotland struck a deal with the government this year called "Project Merlin", in which they pledged to lend more to small businesses.

But the Bank of England said last month those lending targets were missed in the first quarter, with lending facilities to small and medium-sized enterprises coming in at 16.8 billion pounds ($27.4 billion) -- some 2 billion short of the target.

Finance provider Syscap said in its survey on Monday that companies were increasingly lending money themselves to their own corporate customers.

Syscap quoted data from the Finance & Leasing Association (FLA) which stated that this loan arrangement -- known as "vendor finance" -- had experienced an increase in demand this year.

The FLA said the amount of money provided for vendor finance rose 24 percent during the first quarter to 1.17 billion pounds, from 942 million a year earlier.

"Vendor finance is increasingly seen as the way around the roadblock caused by the reluctance of some banks to lend to small-and-medium sized enterprises (SMEs)," Syscap Chief Executive Philip White said in a statement.

"Vendor finance allows businesses to invest in the new plant, machinery and information technology they need without having to go cap in hand to an unsympathetic bank," he added.

Copyright Reuters, 2011