Small businesses are struggling to access finance despite future orders worth hundreds of thousands of pounds – or more – because banks are refusing to accept that strong order books and letters of credit prove they are viable.
The Forum of Private Business, which has repeatedly warned that the need for affordable growth finance is greater during recovery than in the midst of recession, has submitted proposals calling on the Government to pressure banks to address the lack of lending to small firms, which Bank of England figures show has steadily worsened during the past six months.
The proposals, submitted to the Commons committee inquiry ‘Government Assistance to Industry’ and the Government’s green paper ‘Financing a Private Sector Recovery’, include giving more power to local bank managers so they can take into account evidence such as recent orders when assessing loan applications.
Last week the Chairman of Lloyds Banking Group, Sir Win Bischoff, said that old-style ‘Captain Mainwaring’ bank mangers – a reference to a character from the 1970s television comedy ‘Dad’s Army’ – is no longer relevant at large banks.
The Forum is warning that, unless the flow of finance improves, many small firms will be forced to close and the private sector unable to become the catalyst for job creation and economic growth.
"The private sector and small business growth in particular is expected to lead sustained economic recovery but bank lending is getting worse getting steadily worse. Worse, even, than six months ago when the economy was still struggling under severe recessionary conditions," said the Forum’s Finance Director Nick Palin.
"It is a fact that entrepreneurs need even more cost-effective lending in recovery than during a recession so they can invest in their businesses in order to meet renewed demand. This is clearly not happening and there is a serious risk to businesses the wider economy as a result."
He added: "For SMEs to become the real catalyst for sustained growth and job creation, as the Government hopes, banks must be prepared to open their doors to viable businesses again.
"This will require greater transparency, open and continued dialogue with the Government and businesses, robust regulation from the Bank of England including specific timelines for decisions on lending and full feedback when loan applications are rejected, and greater discretion locally with regional bank mangers empowered to make decisions based on their specialised knowledge of local businesses."
Overall, the Forum is calling for:
Greater discretion locally, with bank managers able to take into account other evidence from businesses such as recent orders when making lending decisions.
Clearer definition of what should be expected from banks. The new Bank of England regulator should be able to set specific timelines for lending decisions and there should be written feedback on loan rejections and the time for lending rejections to be appealed.
Greater transparency to restore trust in the banking industry.
Continuation of the momentum and dialogue generated by the Small Business Banking Forum.
Some of the Government’s schemes such as the enterprise Finance Guarantee (EFG) to be made more flexible in the short term.
Information about government support to be made more available to enable SMEs to make informed decisions.
It is clear there is urgent need to free up the flow of finance to small businesses. According to figures from the credit information specialist Equifax small firms are currently being forced to close at a rate of 500 every week.
Ian Pearson founded his business, Lava Accessories, which sells iPod and iPhone accessories, 18 months ago. In the first year of trading the business achieved sales of £1.25 million.
After losing a customer Mr Pearson defaulted on a loan repayment but had agreed a plan with his bank to pay the money back. Without warning it withdrew all his loan facilities. As a result he has now been forced into voluntary liquidation, despite having £400,000 worth of orders in the pipeline.
"I am devastated," said Mr Pearson. "I feel really disheartened and really let down by the bank. They told us that they were here to support us through this painful period but they have just washed their hands of us."
"In the 18 months that we turned over £1.3 million the bank made about £75,000 from us – that’s an incredible percentage of our turnover and they would have earned interest from our future orders – meaning very little exposure for quite a big gain, but they weren’t interested. "
Mr Pearson said he had been advised that his business met the ‘viability’ criteria for the Government-backed Enterprise Finance Guarantee (EFG) scheme, but was shocked that his bank refused on the grounds the scheme did not ‘work in their interests’.
"Despite them being best placed to make lending decisions, local bank managers just don’t have the authority any more – it’s all about committees miles away and tick-box criteria. There is pressing need for change," he added.
Mr Pearson’s problems have been echoed by another business owner with future orders worth even more money.
Forum member Owen De’Ath is the owner and Managing Director of Delta Design Systems Ltd, which has been in business for 23 years.
Mr De’Ath said work had been slow during the recession but now has several lucrative orders, including one worth $57 million (approximately £38 million) to build two power stations in Iraq, supported by a letter of credit of $25 million (£18 million).
But still the banks will not lend and, despite its foreign orders, the firm has been unable to take advantage of government support from the Government’s Export Credit Guarantee Department.
Having planned to expand his site, near Colchester, Essex, and create 40 jobs to meet the renewed demand, Mr De’Ath said it could instead be forced to cut 40 jobs and fears for his firm’s future.
"Banks have closed up and are still not lending or assisting small businesses in our situation," he said. "There is simply not the support for export, for example, that we see in the US and France, where there is assistance on lending based on letters of credit and even strong order books.
"The money we have secured is tied up – it’s irrevocable and can’t be taken away unless we fail to meet the terms of our contracts. But instead I’m being pressured to take loans out against my personal property.
Mr De’Ath added: "The Government is saying that the only way we can get out of the financial mess the country is in is through private sector growth and exporting. We fit these criteria but cannot get any help. Three years ago if you had a letter of credit you could get finance from banks and financial institutions for export but now they won’t even consider it."
"We need to return to local banking – local support for local businesses is few and far between. We don’t see our bank manager any more, unless there is a problem of course. Quite simply, if we can’t get the finance we need to meet these orders it will finish the company."
As part of a review of banking standards, the Forum has also lobbied the banks to tighten the industry’s ‘lending code’ in order to provide businesses with clearer indications of the level of service they can expect.
Proposals include setting specific Service Level Agreements (SLA), introducing an independent appeals system for businesses that believe the code is not being upheld, implementing stricter security checks to guard against credit card fraud and more clarity over the information sought by credit reference agencies approaching businesses on behalf of lenders.
Further, the not-for-profit organisation has submitted proposals to the Office of Fair Trading (OFT) consultation reviewing barriers to entry, expansion and exit into the financial services industry.
In particular, it has called for genuine alternatives to traditional financial institutions and temporary incentives to allow these new business models to flourish – including those less reliant on automated risk systems, which is a major reason credit has dried up.
While recognising the international banking implications of ‘Basel 3’, a new update to the Basel Accords that could, among other measures, see banks forced to retain more capital, the Forum believes there have rarely been better opportunities for new financial services organisations unaffected by the toxic financial assets to enter the market.
The business support and lobby group is working with Funding Circle, An innovative online funding marketplace providing low-cost finance by allowing investors to lend directly to small businesses, sidestepping the banks. Launched in August, the service has already lent £500,000 to businesses across the UK.
Commenting on the new financial landscape, Funding Circle’s co-founder James Meekings said: "While banks remain insistent that they are lending our small business borrowers feel that opaque decision making, coupled with high fees and charges for loans and overdrafts, are stifling their chances of weathering the economic storm.
"Requirements for banks to hold extra capital, coming from both the FSA and in due course under Basel III, could limit their scope for fresh lending. New solutions are required through new competition and one of the best solutions is to circumvent banks entirely by using internet technology to match savers looking for better interest rates directly with creditworthy businesses, which is where we fit in."