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Give local banks freedom to lend, says business group

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Too many firms are being denied credit even though they have full order books, and local banks should be given greater discretion when it comes to lending decisions, the Forum of Private Business (FPB) has argued.

The FPB made the call as part of its submission to the government’s green paper, ‘Financing a Private Sector Recovery’.

The business group claimed that a number of small businesses are struggling to access finance despite healthy sales prospects because banks are refusing to accept that strong order books and letters of credit prove firms are viable.

It is now asking the government to pressure banks to address the lack of lending to small firms.

The FPB warned that, unless the flow of finance improves, the private sector will fail to become the catalyst for job creation and economic growth that the government hopes.

Specifically, the FPB wants local bank managers to be granted greater independence when assessing loan applications from businesses and to be allowed to take into account evidence such as recent orders.

There should be clearer definition of what can be expected from banks, the FSB continued. The new Bank of England regulator should be able to set specific timelines for lending decisions, there should be written feedback on loan rejections and time made available for lending rejections to be appealed.

A greater degree of short-term flexibility needs to be introduced into some of the government’s business finance schemes, such as the Enterprise Finance Guarantee (EFG), and information about government support made more readily available to SMEs, the FPB added.

Nick Palin, the FPB’s finance director, said: “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.”

Mr Palin argued that entrepreneurs need more cost-effective lending in recovery than during a recession so they can invest in their businesses in order to meet renewed demand but claimed that this is not happening and that, as a result, there is a serious risk to businesses and the wider economy.

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.”