smallbusiness.co.uk: Helping your business think big

Lending to businesses has hit an all-time low, which the banks are claiming is due to a lack of demand. Here we speak to experts and entrepreneurs to get the full story

If short-term debt is necessary for long-term expansion, the news that bank lending to businesses hit a historic low in January leads to a dismal outlook for the UK’s economic growth.

Peter Ibbetson, chairman of small business for RBS, says companies are putting their investment plans on hold for better times and concentrating on paying back debts: ‘At the moment, there are fewer businesses approaching us for loans, and they are on average asking for around a third less money than a couple of years ago. Our approval rate is 85 per cent, the same as it has always been. We’ve emphatically supported business in lots of different ways, but we can’t force them to borrow if they don’t want to.’



However, the argument that there isn’t an appetite for borrowing among businesses is running out of credibility, argues Liberal Democrat Treasury spokesperson Vince Cable: ‘There is an issue of decreased demand, but it is highly disingenuous on the part of the banks to argue that this is the sole reason for a lack of lending. 



‘Numerous anecdotes and survey evidence suggest that there are lots of good, viable businesses that can’t get credit on reasonable terms. High fees and severe demands on credit are undoubtedly checking SME growth. Loans are being curtailed by banks in an attempt to shore up their balance sheets and to reduce their risk profile.’



Indecent proposals

Jeremy Ward, director of property management company Incentive FM, tried to secure funding for an acquisition but found his bank reluctant to finance the deal. After a long process the bank finally agreed to put up £500,000 through the government-backed Enterprise Finance Guarantee scheme and £1 million in invoice discounting, only to find the terms unworkable.

‘At the eleventh hour it transpired that the bank would only lend us the money if they could block payments to our suppliers, when they deemed it necessary. In the end we decided not to use them.’

Ward managed to fund the £3 million deal through a clever re-financing arrangement, which involved raising £1 million in equity by re-issuing shares, releasing £700,000 up front. He then agreed to pay the outstanding £1.3 million over a period of two years as a deferred consideration. The deal was a success and the firm now has a turnover of £23 million and no bank debts.

‘In my experience the banks are not business people, they don’t understand the commercial reality of companies, are constantly looking backwards and have no feel for their opportunities,’ he says. ‘Now we’ve proved ourselves, they are much more willing to lend us money on the terms we originally sought.’

John Yardley, CEO of software company JPY, agrees that the problem is not so much a lack of credit, but rather the administrative hoops and terms that companies are made to jump through.



Yardley applied for a modest loan of £25,000 to refurbish his premises. ‘The interest rate was around 10 per cent, which seemed very high considering that the base rate is 0.5 per cent. But what really annoyed me was their lack of flexibility in allowing us to pay it off early. They insisted that we had to pay interest for the full period regardless.’

The company’s overdraft arrangement fee was also put up by a further 0.5 per cent, a measure that Yardley felt was unjustified as the company has a strong balance sheet and plenty of collateral.



‘Twenty years ago, our bank manager used to take us out to lunch. Now we have zero dealings with him and all loan decisions go to the central office at Canary Wharf. What we need is more competition. In America there are a lot more banks to choose from, but here there seems to be a cartel situation where we only have four or five mega-banks that can charge what they like.’



Deal or no deal



Phil Garvey, chief executive of IT company Whitespace Waste Software, recently managed to secure £1 million for an acquisition through his bank. ‘I know that bank bashing has become very popular, but people need to realise they are not here to do us a favour.


‘The key was to make sure our accounting was open and visible. For the sector we operate in, things have got busy again. My advice would be: if you failed to get funding six months ago, try to understand why and go back and ask.’



Martin Williams, CEO of credit referencing agency Graydon, says securing funding is getting easier for certain businesses, while some are still being refused loans on the basis of their sector. ‘Having a good credit rating in itself is no guarantee of getting a loan. The banks are being cautious because they don’t want to be criticised. I don’t think banks will regain their appetite fully until the economy really improves. When they have more confidence, lending will pick up,’ he says.



Huw Morgan, head of business banking at HSBC, admits that some industries may find it more difficult than others to obtain finance, but believes the bank is starting to see signs of an uptick in lending: ‘The perception that lending is difficult to obtain could be putting people off, and we certainly have a responsibility to communicate more effectively that we are open for business. I expect there will be an improvement in the situation when businesses know where they stand after the election.’

State of play



News that RBS and Lloyds have fallen short of their business lending commitments for 2009-10 is the latest indication of how far off-target we are in reaching lending normality. In this light, businesses are likely to be sceptical about chancellor Alistair Darling’s recent claim to have ‘made banks accept their obligation to lend more’.



Like any opposing party politician, Cable points the finger of blame at the government for the gap between promises and reality: ‘The essence of the problem is that they have seriously failed to regulate a legally binding agreement. This is partly the fault of the government and regulators for placing regulation on the semi-nationalised banks to build up capital, even though they don’t need it as they are nationalised and aren’t going to fail.’

In his Budget speech, Alistair Darling acknowledged the frustrations of businesses, admitting, ‘There are still companies who are being unfairly denied credit and feel that they are powerless to challenge the decision.’ 



To address this issue, the chancellor announced a new Credit Adjudication Service with ‘legal powers to enforce its judgments’ in cases where credit has been ‘wrongly denied’. He also reiterated his commitment to encourage more competition through the creation of new banks, pointing out that ‘at least five new banks have either established themselves as business lenders or are in the final stages of setting up’.



Only time will tell if banks can be cajoled or forced into backing business growth, but with a general election looming, the lending landscape looks set to remain uncertain in the short term.