Business Group Supports Alternative to Banks and Calls for Local Freedom to Lend to Firms with Strong Orders

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Small businesses are struggling to access finance despite future orders worth hundreds of thousands of pounds - or more - because banks are refusing to accept that strong order books and letters of credit prove they are viable.

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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.

Small businesses are struggling to access finance despite future orders worth hundreds of thousands of pounds - or more - because banks are refusing to accept that strong order books and letters of credit prove they are viable.

The business support and lobby group the Forum of Private Business is calling for reforms to boost affordable bank lending and help new and alternative financial organisations compete in the market.

The Forum is working with Funding Circle, an innovative online funding marketplace providing low-cost finance by allowing investors to lend directly to small businesses, sidestepping the banks. Launched in August, the service has already lent £500,000 to businesses across the UK.

The organisation has submitted proposals to the Commons committee inquiry ‘Government Assistance to Industry’ and the Government’s green paper ‘Financing a Private Sector Recovery’, including giving more power to local bank managers so they can take into account evidence such as recent orders when assessing loan applications.

“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,” said the Forum’s Finance Director Nick Palin.

"It is a fact that entrepreneurs need even more cost-effective lending in recovery than during a recession so they can invest in their businesses in order to meet renewed demand. This is clearly not happening and there is a serious risk to businesses the wider economy as a result.”

He added: "It 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.

“There should also be more support to help innovative funding solutions and financial service providers, alternative to traditional lenders, to enter the market.”

The not-for-profit Forum has also submitted proposals to the Office of Fair Trading (OFT) consultation reviewing barriers to entry, expansion and exit into the financial services industry.

Commenting on the new financial landscape, Funding Circle’s co-founder James Meekings said: “While banks remain insistent that they are lending our small business borrowers feel that opaque decision making, coupled with high fees and charges for loans and overdrafts, are stifling their chances of weathering the economic storm.

“Requirements for banks to hold extra capital, coming from both the FSA and in due course under Basel III, could limit their scope for fresh lending. New solutions are required through new competition and one of the best solutions is to circumvent banks entirely by using internet technology to match savers looking for better interest rates directly with creditworthy businesses, which is where we fit in.”

On bank lending, the Forum is calling for:

  •     Greater discretion locally, with bank managers able to take into account other evidence from businesses such as recent orders when making lending decisions.
  •     Clearer definition of what should be expected from banks. The new Bank of England regulator should be able to set specific timelines for lending decisions and there should be written feedback on loan rejections and the time for lending rejections to be appealed.
  •     Greater transparency to restore trust in the banking industry.
  •     Continuation of the momentum and dialogue generated by the Small Business Banking Forum.
  •     Some of the Government’s schemes such as the Enterprise Finance Guarantee (EFG) to be made more flexible in the short term.
  •     Information about government support to be made more available to enable SMEs to make informed decisions.

Ian Pearson founded his business, Lava Accessories, which sells iPod and iPhone accessories, 18 months ago. In the first year of trading the business achieved sales of £1.25 million.

After losing a customer Mr Pearson defaulted on a loan repayment but had agreed a plan with his bank to pay the money back. Without warning it withdrew all his loan facilities. As a result he has now been forced into voluntary liquidation, despite having £400,000 worth of orders in the pipeline.

"I am devastated,” said Mr Pearson. “I feel really disheartened and really let down by the bank. They told us that they were here to support us through this painful period but they have just washed their hands of us.”

“In the 18 months that we turned over £1.3 million the bank made about £75,000 from us – that’s an incredible percentage of our turnover and they would have earned interest from our future orders – meaning very little exposure for quite a big gain, but they weren’t interested. “

Mr Pearson said he had been advised that his business met the ‘viability’ criteria for the Government-backed Enterprise Finance Guarantee (EFG) scheme, but was shocked that his bank refused on the grounds the scheme did not ‘work in their interests’.

“Despite them being best placed to make lending decisions, local bank managers just don’t have the authority any more – it’s all about committees miles away and tick-box criteria. There is pressing need for change,” he added.

Mr Pearson’s problems have been echoed by another business owner with future orders worth even more money.

Forum member Owen De’Ath is the owner and Managing Director of Delta Design Systems Ltd, which has been in business for 23 years.

Mr De’Ath said work had been slow during the recession but now has several lucrative orders, including one worth $57 million (approximately £38 million) to build two power stations in Iraq, supported by a letter of credit of $25 million (£18 million).

But still the banks will not lend and, despite its foreign orders, the firm has been unable to take advantage of government support from the Government’s Export Credit Guarantee Department.

Having planned to expand his site, near Colchester, Essex, and create 40 jobs to meet the renewed demand, Mr De’Ath said it could instead be forced to cut 40 jobs and fears for his firm’s future.

“Banks have closed up and are still not lending or assisting small businesses in our situation,” he said. “There is simply not the support for export, for example, that we see in the US and France, where there is assistance on lending based on letters of credit and even strong order books.

“The money we have secured is tied up – it’s irrevocable and can’t be taken away unless we fail to meet the terms of our contracts. But instead I’m being pressured to take loans out against my personal property.

Mr De’Ath added: “The Government is saying that the only way we can get out of the financial mess the country is in is through private sector growth and exporting. We fit these criteria but cannot get any help. Three years ago if you had a letter of credit you could get finance from banks and financial institutions for export but now they won’t even consider it.”

“We need to return to local banking – local support for local businesses is few and far between. We don’t see our bank manager any more, unless there is a problem of course. Quite simply, if we can’t get the finance we need to meet these orders it will finish the company.”

As part of a review of banking standards, the Forum has also lobbied the banks to tighten the industry’s ‘lending code’ in order to provide businesses with clearer indications of the level of service they can expect.

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