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‘Inconsistent’ lending policies hampering small business borrowing

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Small firms are failing to secure finance because banks are not being consistent in their lending policies.

The research was carried out by Ipsos MORI on behalf of the Institute of Chartered Accountants in England and Wales (ICAEW).

It found that there were often differences in lending decisions between between bank managers and their head offices, and that many small businesses were apprehensive about approaching their banks for funds because they were worried it would trigger increased bank charges.

The ICAEW said that banks need to be both more consistent and transparent in their dealings with small businesses.

Michael Izza, chief executive of the ICAEW, commented: “Banks need to restore the trust between themselves and their small business clients. A commitment is needed to increased transparency and consistency. This in turn will help the relationship between the two which has deteriorated rapidly during the recession.”

To re-establish that relationship, the report set out a number of recommendations.

Central to restoring confidence, the ICAEW continued, was improving the communication between banks and businesses at the early stages of the lending process.

Banks should say how long loan applications are likely to take; make clear what authority branch mangers have and which decisions are made by head office; clarify the stages of the application process; detail the enforcement regime for any breaches of the lending agreement; and spell out exactly how much financial information will be required from the SMEs, including regular management of accounts.

The survey also showed that banks are imposing more severe penalties for firms that fail to keep to their lending conditions, which means that many businesses are not approaching their banks for fear that it could lead to increased charges.

Mr Izza added: “The relationship between banks and customers needs to be supportive, not just in the good times, but also in the bad. Small businesses are the heart of the economy and knowing that they have reliable help when needed is crucial in helping the UK come out of recession.”