March 2012 - Why banks still need to do more for SMEs


Business Law Update
March 2012

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The 200th anniversary of Charles Dickens’ birth has just been marked across the UK and I am reminded of the most famous line from Oliver Twist, Please Sir, can I have some more?

It has recently been announced that, overall, banks fell short of their Project Merlin lending targets to small businesses by £1.1 million. So what the Dickens is going on?

The figures

Figures released on 13th February showed that gross bank lending to businesses overall was £214.9 billion in 2011 compared with a target of £190 billion and some 20% higher than in 2010.

However, lending to small businesses was £74.9 billion compared with a target of £76 billion. Barclays, Lloyds, HSBC and Santander all claim they met their targets which means that RBS, the largest lender to SMEs was principally responsible for the shortfall.

It should also be noted that these figures reflect offers of credit rather than credit actually taken up, so the actual amounts of money passing from the banks to small businesses was less than this.

What banks and businesses say

Banks say that fewer small businesses are applying for credit, and that they are lending more responsibly than in the heady days before the Crunch.

Recent surveys by Bibby Financial Services and the Federation of Small Businesses revealed that many owners of SMEs are financing their businesses through savings and loans from family members.

So, it looks like a chicken and egg situation: are banks lending less as businesses owners are financing their firms, or are businesses looking to their owners for finance as the banks are not lending?

An excellent survey from BDRC Continental seeks to discover what is really going on.

Applications - It reveals that applications for new credit remained fairly static whereas applications to renew an existing credit facility dropped sharply from 10% to 6%. A massive 49% of SMEs had not used any external finance within the past 5 years and 34% said they had not borrowed, did not want to borrow and had no plans to borrow in the future.

Reasons for the drop - Of those who did want credit but failed to apply, 6% reported the reason as informal discouragement by their banks and 44% as reluctance to apply given the current economic conditions.

Overall the survey reveals that 60% of small businesses say they did not need more credit. Of these, many were concerned about the cost of credit and the state of the economy.

This certainly gives a picture of a stagnant small business sector. Although the number of start-ups is high, many firms are simply not growing and do not have plans for growth.

This is concerning for the economy overall as I believe that growth will be led by SMEs. As economic conditions improve, there will be a need for further credit financing and banks will remain the prime source of such funding. Now is the time to sort out the dysfunctional banks and get them lending again; surely that is why we bailed them out in the first place? The government’s Credit Easing policy should help, but banks need to review their lending criteria and be prepared to take more risks with SMEs.

Gary Cousins
Business Solicitor
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Sue Mann
Nigel Musgrove
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