Early indications suggest banks are still not lending to small businesses

30 January 2009

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Despite a series of government measures designed to guarantee lending, members of the FPB are still not able to access finance from the banks. The Government's Enterprise Finance Guarantee (EFG) was introduced to underwrite lending in order to reduce the banks' perception of small businesses as ‘high risk'. However, even profitable members of the FPB are reporting that they are still being rejected for loans and overdrafts by some of the UK's major banks.

In its review of the Pre-Budget Report (PBR), which was published on 28 January 2009, the Treasury Committee warned that the Government must continually review the effectiveness its new financial measures.

"These financial packages were a welcome next step in supporting small business lending and stabilising the economy. However, despite this government intervention, the early indications are that small businesses are still being bracketed as risky propositions, often regardless of how well they are performing in difficult conditions," said the FPB's Chief Executive, Phil Orford. "The Treasury Committee has concluded that access to finance is the single most critical issue facing businesses in the UK. Many of our members continue to struggle because the banks are still not lending to adequate levels, and it is right that the Government, the small business lobby and the banks themselves scrutinise the effectiveness of these schemes in order to do more where it is needed."

FPB member Wesley Services is a small manufacturing company in Leeds. It was established in 1967 and now employs 25 people. Joanne Ward, the company secretary and financial controller, attended a meeting with her bank manager to discuss renegotiating the firm's overdraft. When she mentioned the EFG, Mrs Ward was shocked at the reply she received.

"He just said: ‘We don't like these schemes and we're not interested in them', we didn't push it any further – we're in overdraft at the moment and we didn't want to give them any excuse to call it in," said Mrs Ward. "They wanted personal director's security but, when we didn't agree, straight away they took £35,000 off our facility and gave us just days to pay it off, then imposed a rate of 27% over base for the ‘breached' part."

"We are looking into other areas, such as asset-based finance. We intended for it to be used to support our cash flow, but when the bank found out we had assets they told us the money would have to go towards paying our overdraft. Now, I'm frightened that the bank will insist that any chunk of cash coming in is used to further reduce our limit."

Established in 1991, FPB member Saxon Oil is based near Coventry and supplies industrial and automotive lubricants. Stephen Harkin, who like many business owners is unable to obtain credit or credit insurance, believes that nothing has changed since the Government introduced its guarantee schemes.

"There is a huge knowledge gap about the EFG on a local level. When we approached our bank manager, all he could talk about was the old Small Firms Guarantee scheme, and he was going down the line of requiring personal guarantees," he said. "The latest accounts we put in show we made a sizeable profit, and yet the bank was still prepared to bounce a cheque I paid out that would have taken us just £18 overdrawn. The bank manager told me he didn't care if it was £18 or 18p, it was all the same to him. They won't let us go overdrawn by a single penny – what sort of attitude is that? It flies directly in the face of what the Government is trying to achieve."

Mr Harkin added: "A lot of companies are going to require capital for development in the coming months. You can get money if you're a big company, but not if you're small. Unless credit is released, many small employers will go to the wall."

Another member of the FPB, the owner of a distribution business in Glasgow, who did not want to be identified, said that the EFG discriminates against relatively healthy companies unable to expand because of the economic climate.

"For most small businesses at the moment it's not a question of expanding but taking up the slack," he said. "However, with credit drying up to the extent it has, many simply can't even bridge this gap. The qualifying criteria of this scheme does not adequately define what a ‘viable' business is, and this means the banks can plausibly exclude quite healthy businesses."

He added: "I have had to pay my HMRC tax bill but, because I can't borrow any money from the banks, it has had to come out of my cash flow. On top of squaring off my creditors, this has left me short.

"Worryingly, I spoke to my bank manager about the scheme and she admitted she hasn't a clue what is going on. She said that any lending she puts through is being automatically refused. The banks appear to be protecting themselves at the expense of everybody else."

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Early indications suggest banks are still not lending to small businesses

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