August 2011 – Bank lending to SMEs – it’s time for action


Business Law Update
August 2011

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Gary CousinsWelcome to our August newsletter.

This month’s feature article calls on the Government to do something positive to support SMEs. There’s advice on when you can and can’t rely on your terms of business to create a legally binding contract and an opportunity for manufacturers to have their say on cutting Red Tape.

We hope you will find information relevant to your business in this month’s issue. Email your article suggestions or legal questions to       

Gary Cousins
0121 778 3212

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Bank lending to SMEs – it’s time for Government to take action

It’s not just the weather that’s bad this summer; the economy’s not looking too sunny either.

Bank lending to businesses continues on its downward track with the reduction in lending in June being faster than the average of the previous six months. Small businesses are particularly suffering; according to the Bank of England, lending to small businesses fell 4.2% in May compared to the previous year.

Businesses are blaming the banks for not lending and it’s certainly true that it’s harder to get a loan now than it has been for decades. Some 28% of loan applications by small businesses are currently being rejected compared to around 4% before the Crunch.

It also seems that many SMEs who could do with extra funding are deciding not to apply through fear of rejection and fear that it may adversely affect their existing overdraft terms. They are holding back on growth plans and, given that the entire economy depends on SME growth, this is a very worrying trend.

Where banks do lend, they are charging SMEs far more in interest rates than larger firms: in many cases over 5% – that’s 10 times the base rate!

I suspect the banks fear another recession and are paranoid about filling up their asset books with more dodgy loans. Certainly, the economy as a whole looks shaky, with the prospect of several countries defaulting in the Euro zone to even the risk of a US default which was only narrowly averted. Clearly, capital is flowing out of the West and into China and other countries in the East, and even they have some economic hurdles to jump.

So where does this leave us? The business secretary, Vince Cable, is calling for another round of Quantitative Easing to boost demand but I suspect the problem is deeper than that and QE could so easily lead to further inflation and the need to increase interest rates. Growth can only come from real growth in the SME sector. That requires investment, which relies on growth finance, and the banks are reluctant to provide that. Demand in Asia is high and, unless suitable firms have the means to exploit those markets, we will fall further behind.

It’s about time the government took decisive action. Public sector cuts are only part of the solution; there is also the need to facilitate the flow of growth finance into the economy. I am not talking of going back to the pre-Crunch lending boom – that was unsustainable – but the choking off of good firms who could grow with the right support must stop. In years to come, we will look back at this period with amazement at how we squandered the opportunity of using the mainly-nationalised banks as a source of lending to SMEs with good prospects. If these banks could be made to increase their lending, then it’s likely that other banks will soon follow.

What’s been your experience of bank lending in the last 12 months? What could the Government do to improve the prospects for SMEs? Join in the debate via our blog.

Plain English Legal Advice

Can you rely on terms of business to provide legal protection?

It never fails to surprise me how many small businesses appear to have been misinformed when it comes to how they use their standard terms of business. I’ve seen them printed on the reverse of an invoice, included with a delivery note, even a payment reminder.

If you have gone to the trouble of preparing standard terms and conditions for your business, it is usually because you want to cover yourself legally. Whether your business is the supply or purchase of goods or services, your terms of business should cover all the standard items which you want to include in your contracts without having to think about them each time you enter into a new agreement – matters such as order acceptance and delivery procedures, payment terms, any termination rights, limitation of liability and so on. So far so good. The problem arises in relation to when these are provided to the other party.

In order to rely on your standard terms as part of your business contracts they need to be incorporated into your contracts. The key element is that the standard terms must be incorporated into the agreement before it is concluded. That is why terms sent out only on an invoice or with a delivery note are unlikely to form part of a legally binding contract – by then the agreement has been entered into and each party will probably also have performed its obligations, to some extent at least, if not in full.

The methods for incorporating standard terms into your business contracts will vary depending on your procedures for placing and accepting orders. In an ideal world you would supply a copy to each new customer or client and ask them to accept – in writing - that those terms will apply to all contracts between you. That method assumes that you will have the time and cooperation of your customer.

In the real world you are likely to be more pressed for time and will want to conclude an agreement as quickly as possible and get on with the supply of the goods or service in question. In such circumstances you need to make sure that you bring your standard terms to the attention of your customer at an early stage in the negotiations. This can be done in various ways such as sending them out with any quotations, including them as part of any sales literature, posting them on your website or a combination of any such methods.

It is not however sufficient simply to have those terms available if your customer cannot reasonably be expected to have been aware of them and have had the chance to consider them – you should make it clear that your contracts include those terms. Again this will depend on how you accept orders or whether you allow customers to accept your quotations, but you can indicate that all your contracts are subject to your standard terms of business and indicate how those can be accessed.

For further advice on making sure your standard terms form part of your business contracts, contact Sue Mann on 0121 246 4437 or by email.

News in brief 

Licensing changes on the horizon 
The Police Reform and Social Responsibility Bill is currently progressing through Parliament. Licensing Solicitor, Nigel Musgrove, points out that this is likely to have far-reaching effects on the licensing profession. Read more…

Manufacturers urged to help cut Red Tape 
David Cameron claims that one of his key aims is to ‘massively reduce the number of rules, laws and regulations’ we all face in business and our day-to-day lives. In a bid to get feedback on current regulations, the Government is examining all regulations as they affect different sectors of industry. It’s the turn of manufacturers at the moment. Have your say via the Red Tape Challenge website.

There’s also an opportunity for anyone to comment on general regulations in areas such as Company Law, Health and Safety, Equality and Employment related law. If you’ve ever found yourself bemoaning the red tape you face in business, now is your opportunity to have your say.

Useful Links

7 common reasons why small businesses fail
Real Business provides some suggestions as to why 4,121 companies went into liquidation during the first quarter of 2011. 

The facts about trademarks
The Intellectual Property Office has published a useful set of frequently asked questions to answer such queries as ‘Am I breaking the law by using “TM” on trade mark?’ and ‘Does my ownership of a domain name secure my ownership of that brand?’ Take a look at the full list of questions on the IPO website

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