2011 Is Finally Seeing A Rise In Commercial Mortgage Lending

It has been a tough few years for small businesses. Banks have been reluctant to lend to medium sized enterprises since the 'credit crunch' and companies have found it difficult to obtain the bank loans and commercial mortgages they need to build their businesses.

In 2008, the market crashed and one market that was hit the hardest was the property market. Many businesses defaulted on loans as they were unable to keep up their repayments, and this left banks uneasy about lending for commercial property as well as residential property. But it would appear their faith is returning and lending is back on the rise for commercial property.

There was over GBP1 Billion in new money being loaned to businesses in the three month period to January 2011. Whilst this represents on a small share of the actual credit required by businesses, it does show a promising trend. Loans grew at a rate of 2.6 per annum in the last quarter.

It is possible that the banks are starting to loan more before they are forced to. When the traditionally 'light touch regulation' Conservatives start to make noises about compelling the banks to loan more to industry and retail, it is a sign that a shift in culture might be on the way. The government have announced 'Project Merlin', the result of a deal with the banks to lend to business.

The project will directly affect bank bonuses for this year, and the Government have confirmed that unless they see a rise in commercial mortgages for small businesses in 2011, the bonuses will not be paid and banks will therefore suffer. This of course, is expected to cause a change for the better in the commercial lending markets over the next 12 months.

As part of Project Merlin, bank chief executives will be measured on their business lending when it comes to determine their own bonuses.

Smaller businesses have spoken out over concerns that the banks will not keep to their word, as although commercial lending is beginning to rise, this is mainly due to lending to larger organisations. But Project Merlin dictates that 40% of the commercial lending for this year will need to be loaned out to smaller companies in order to qualify for their bonuses at the end of 2011, so there is hope that this may urge them to steer away from larger companies and focus on the growing smaller businesses.

Small businesses need the commercial lending in order to expand, and without this funding their sector will remain stagnant as they will not have the money available required to move into larger premises with commercial mortgages, to employ additional staff or to increase their product purchases to keep up with growing demand.

A comment by the British Chambers of Commerce confirmed that if the banks do not slacken their criteria and start lending to smaller businesses again, they'll be shooting themselves in the foot as a slow or levelled growth will mean that the banks will suffer too.

If the banks manage to reach their targets on commercial lending for this year, we will see a huge improvement on the state of the UK economy, which will also have an impact on the rest of the world too.