Small Business Lenders

Innovation "needed to change the lending landscape"

Recently, a constituent, the managing director of a profitable design business approached me to help him deal with his bank because he was finding it difficult to renew a £100,000 overdraft for the business. The overdraft was secured against a property worth more than twenty times the value of the debt, the cash flow projections were strong but the renewal application, sent weeks before the overdraft expired, had disappeared into a void at the bank.

Representing a seat bursting with business-owners and seasoned entrepreneurs, I hear time and again how well-established businesses struggle to access bank finance. Another business-owner with a forty year track record in the construction industry put the point succinctly to me; “when the banks should have been applying the brake, their foot was firmly on the throttle and now that their foot should be on the throttle, it is firmly on the brake”.

According to the bank-funded Business Monitor that was published this week – which is being used by the Business Department (BIS) to benchmark the treatment of small businesses by banks – confidence in the banks is weakening. Just 40pc of small firms planning to secure new or renew existing finance in the next 12 months saying they were confident of succeeding compared with 70pc of those who had applied in the last year.

In one respect, the first entrepreneur I referred to was lucky to have the other loan at all; anyone who has run a small business – I have, and have the scars to prove it – will know that banks prefer not to lend to a business unless it moves it’s primary account and other business to that bank. While consumers who can have a current account with Barclays, a mortgage with Northern Rock and a credit card with HSBC, small businesses are restricted to dealing with banks in a concentrated and uncompetitive market – the top five banks control 90pc of the market and have done since 2002.

Partly because of this concentration – and in the case of the Royal Bank of Scotland Group overexposure to the small business market with about 25pc market share (down after divesting off part of its loan book) – banks focus on cross-selling new products rather than increasing their lending exposure.

No wonder businesses feel banks have adopted a ‘take it or leave it’ approach to small business lending . Banks have become much more selective about which firms they back and are unlikely to change their minds if they reject a loan application.

Banks taking a long time approving Small Business LoansSmall Start ...

Keeping the rejection rate into consideration, small business lending institutions have adopted a take it or leave it attitude towards ‘small business loans’. A recent survey named ‘The bank-funded Business Monitor’ studied the treatment received by small businesses as they ask for business loans from banks.

Last year around 28 percent of loans were declined approval during processing of the application itself. An equal percentage of applicants were denied loans at the end of the application process. This includes even amended applications and as result loan demand of borrowers has been reduced. In 2007, only 4 percent of business loan applications were treated in a similar way.

Small business owners no longer have confidence towards traditional lending institutions as revealed while studying 5000 small businesses. But 40 percent entrepreneurs surveyed still believe in the traditional methods of funding. But this is a straight 70 % decline in comparison to entrepreneurs who applied one year ago. Reasons given for rejection are not considered satisfactory enough by small businesses owners.

Lack of relationship between traditional lenders and small business customers is another reason for the slowdown of small business lending. Enterprises without proper track record are left out while established borrowers are funded promptly. So, when there is news of money flow then people start to doubt its relevance as they feel it is true for a select group of borrowers.

In the current climate, banks are unwilling to grant loans to businesses that are new customers. But with support received from SBA, lenders are found to loosen their strap a bit. This is good news for Small business owners who seek financing. Alternative financing too exists for businesses. The alternative methods of funding makes it easier for enterprises to find capital if they have a good track record and business credit score.