The UK's five largest banks have come under increasing pressure to lend more to small business under the terms of the Project Merlin agreement. Business secretary Vince Cable applied political weight this week after SMEs lending for the first three months came in at just £16.8bn – falling short of the £19bn-a-quarter target agreed with government. Cable has called on the banks to clearly explain how their incentives for senior managers are linked to SME lending: “They’ve so far declined to put the information in the public domain and I’ve written this week to the chairman to tell them this isn’t good enough and I’ve invited them to reconsider their position.” The two state funded Merlin banks, RBS and Lloyds Banking Group, already link managers’ remuneration with SME lending, but it is not known whether Barclays, HSBC and Santander have fallen in line as well. Cable also said that if the situation has not improved by next year, the government will be justified in absolving itself of its promise not to change the tax regime. The continuing strained relationship between the banks and SMEs was highlighted in recent BIS data that indicates the annual rate of growth in lending to SMEs has been negative since late 2009 and fell to -3% in February 2011. Data published by the British Bankers’ Association (BBA) also indicates that the growth rate of lending to small businesses - defined as turnover up to £1m - stood at -6% in December 2010. While there appears to be an issue with the supply and cost of finance, the banks have argued that there is a lack of demand from small businesses. The BBA recently noted that “the available capacity was not fully taken up due to muted demand” adding that “SME lending demand reflects the relatively slow growth in demand for goods and services in the economy as a whole at present.” The April CBI survey of SME expansion intention also highlighted this issue, with only 8% of SMEs citing finance as a concern. Jonathan Russell, partner at ReesRussell, added: “We have a chicken and egg situation where small businesses are not asking banks for money because of the initial reception they get from them. I have seen many businesses start the process, however, they found the time scales taken by the banks, the depth of questions they are asked and the banks' unapproachable nature meant that they decided to not go any further with the process. “We have seen banks trying to change the terms of previously made facilities by increasing margins, with the thinly veiled threat that facilities will not be renewed when they come up for renewal if the new terms are not accepted," Russell said. Earlier this week the Merlin banks came face-to-face with 80 SMEs to explain their loan decision process and search for a solution. Event organisers Better Business Finance, supported by the BBA, arranged the meeting in Manchester in the wake of banks missing the first Project Merlin target. While banks and businesses are being urged to come together to boost economic growth, the IMF also warned this week that UK banks’ lenience to struggling customers may be disguising the dangers the institutions face. In its latest verdict on the UK economy, the IMF said that lender forbearance, where loans are extended or payments reduced, “may, in some cases, have masked the extent of risks, given the high indebtedness of the household and commercial real estate sectors.” While the bank-SME relationship continues to be strained, Phil Orford, chief executive of the Forum of Private Business who spoke at the event, said the time for “bashing and blaming” had passed, and instead urged banks and businesses to find common ground: “Surely the time has come to acknowledge the issues and to find ways to move forward, constructively and collaboratively. “We are talking about enabling or disabling our recovery – it’s now that serious. Businesses and the banks need to take a critical inward look and accept that the days of easy credit have gone” added Orford. He also urged small firms to implement a range of measures in order to improve their creditworthiness and to think objectively about how they appear to potential lenders. These included: Orford called on the banks to improve what they offer to businesses and speed up efforts to produce a viable alternative to cheques. He added: “Flexible products – maybe even bundled products – which allow borrowers to switch around for use at the appropriate time. Technological advances must enable faster process at reduced cost to business – particularly for the smallest - and I would cite faster payments as an example.” Over the next couple of weeks we'll take a closer look at how to prepare your business case and alternative sources of finance.
Banks grilled over small business lending
Lending trends
Better Business Finance
Friday, 10 June 2011
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