Mixed picture on bank lending to businesses
New research on bank lending to smaller firms has thrown up both encouraging and discouraging news.
According to the SME Finance Monitor Report, which was compiled by research specialists BDRC Continental and which is used as a guide by the Business Department on the state of small business credit, just over a half of all small firms that applied for finance from the banks in the last 12 months were successful.
However, the report, which surveyed some 5,000 firms, also revealed that 15 per cent of businesses that felt that they needed funding did not apply to their banks for credit.
What’s more, the rate of bank refusals has increased since the beginning of the economic downturn in 2008.
According to the report, 72 per cent of overdraft applications and 59 per cent of loan applicants saw their exact requests met over the last year.
At the end of the application process, 85 per cent of overdraft and 66 per cent of loan applicants had some form of facility.
But in 2007, the approval rate for overdraft request stood at 90 per cent.
There are also underlying problems with business confidence in the bank lending system. A significant proportion of firms are worried about obstacles, real or imagined, to applying for finance.
Some 18 per cent of respondents believe they will require finance in the next three months but are concerned they will be unable to make a credit application until economic conditions improve.
The present state of the economy was regarded as the main barrier to borrowing, but close behind is either direct discouragement, usually following an informal inquiry at a bank, or discouragement of a more indirect kind because the business expected to be turned down.
Only 51 per cent of SMEs are presently using external finance, significantly fewer than in 2007 (69 per cent) and in 2004 (81 per cent).
Out of the 19 per cent that reported a request for bank credit in the past 12 months, 15 per cent said they had applied for new or renewed lending facilities.
While 4 per cent opted to reduce or pay off a loan, overdraft or both in that time, some 5 per cent reported it was their banks which cancelled overdrafts or re-negotiated borrowing.
The figures also suggested that certain types of business struggled in particular in their efforts to secure the level of bank finance for which they asking. These included smaller employers and sole traders, those seeking new rather than renewed funding, and firms less than 10 years old.
Shiona Davies, director at BDRC Continental, said: “The purpose of the survey is to give people a robust and independent picture of what is happening to SMEs and borrowing.”
The British Bankers’ Association took a positive view, saying: “The results show that most business are able to get the credit they need and that customers with a good track record and sound credit history find the process straight forward.
“It clearly pays to have a strong, ongoing relationship with your bank as existing customers were rarely turned down. However some businesses are concerned about the process and we will address this issue.”
Not everyone, though, adopted such an optimistic line.
Katja Hall, the CBI’s chief policy director, acknowledged that banks remain the most important source of finance for SMEs and described the research as encouraging given that the majority of requests for overdrafts and loans were agreed.
But Ms Hall added: “Access to finance remains challenging for smaller companies and start-ups, so banks need to ensure their lending models support these businesses to grow and create jobs.
“It’s concerning that far fewer SMEs are confident about receiving the funding they apply for over the next quarter than those who actually got what they asked for last year. This shows that banks need to work hard to build stronger relationships with their smaller business customers.”
John Walker, the national chairman of the federation of Small Businesses, highlighted the plight of particularly small firms.
Mr Walker said: “These figures tell us what we already knew: the very smallest businesses are the ones bearing the brunt of a contraction in bank lending. Small firms have been telling us for the past few years that they are fearful of approaching the banks for new finance, or to extend an overdraft, because they know they are likely to be turned down, or be offered a deal on terms that just aren’t favourable for them.
“The picture that emerges from this independent research shows that the smallest SMEs are losing out – with a third being refused outright when initially applying for new finance. This figure is more than double the bigger SMEs being refused. So the big question is why medium sized companies are getting a better deal.
“The FSB has long been calling for greater competition in the banking sector to give the smallest firms a better chance of securing a better deal, and these results show the importance of that demand.”
Alex Jackman, senior policy adviser at the Forum of Private Business, applauded the report as “helpful in clearing some of the fog of war we have seen in recent years between businesses and banks”.
But he went on to say that small businesses are clearly experiencing a crisis of confidence in the UK’s banking system and that, while policies and practical measures are needed to restore trust in the banks, the way should also be paved for innovative, alternative funders to compete in the finance markets.
Mr Jackman continued: “Banks have to work harder to better communicate the lending process to their customers and, at the same time, improve their infrastructures so that they can gauge lending risk more accurately.
“Lenders should also be helping their customers to produce and present financial information in a way that establishes their creditworthiness – and, certainly under the taskforce’s own appeals process, be pointing them towards alternatives if they feel they cannot meet their needs.”