Sir Richard Branson is wrong in wanting banks to lend more money to small business
Sir Richard Branson's assertion that the UK economy needs banks to lend more is the latest of many calls for more to be lent to Britain's small businesses. It is also the latest that comes from a misunderstanding of how banks operate, and their reluctance to drag the global economies back into deep difficulties. That it comes from someone who is planning on launching a new high street bank could be seen as troubling.
In simple terms, Banks are required to keep a certain level of solvency - that is have assets and funds available to cover the risk of defaults on the money they lend. These assets can be anything from gold held in vaults to stocks and shares, foreign currency or property. With the current economic uncertainties - from double dip recessions to deflation in property markets to the near collapse of the Eurozone and its stock markets - it is difficult to maintain adequate funds. In turn this is making the banks less willing to provide credit to small business which, in their view, already have a reasonable chance of failure.
"Entrepreneurs" also have their part to play in this. A recent conversation with a small business manager in a bank revealed many of the "new businesses" that he was seeing were poorly thought out with no real business plans and little prospect of success. Often cash flow projections were unrealistic, sales targets massaged to make the business look viable and very few answers offered when challenged. He cited one example of an "entrepreneur" who wanted to open a shop selling much the same products in much the same way as the business that had folded in the premises he was taking over.
There are no easy answers to this. For Banks to lend more money solvency rules would need to be changed and as a society we would need to be willing to pump money back into them if things go wrong. Equally, entrepreneurs need to think much harder about the businesses they want to create, their viability and their funding.
In simple terms, Banks are required to keep a certain level of solvency - that is have assets and funds available to cover the risk of defaults on the money they lend. These assets can be anything from gold held in vaults to stocks and shares, foreign currency or property. With the current economic uncertainties - from double dip recessions to deflation in property markets to the near collapse of the Eurozone and its stock markets - it is difficult to maintain adequate funds. In turn this is making the banks less willing to provide credit to small business which, in their view, already have a reasonable chance of failure.
"Entrepreneurs" also have their part to play in this. A recent conversation with a small business manager in a bank revealed many of the "new businesses" that he was seeing were poorly thought out with no real business plans and little prospect of success. Often cash flow projections were unrealistic, sales targets massaged to make the business look viable and very few answers offered when challenged. He cited one example of an "entrepreneur" who wanted to open a shop selling much the same products in much the same way as the business that had folded in the premises he was taking over.
There are no easy answers to this. For Banks to lend more money solvency rules would need to be changed and as a society we would need to be willing to pump money back into them if things go wrong. Equally, entrepreneurs need to think much harder about the businesses they want to create, their viability and their funding.
Subscribe to our journal | Share this page
|