Restore Trust in Banks says Forum
Restore trust in banks and give alternative funders a chance, says Forum following new SME lending figures
The Forum of Private Business is responding to the release of the first quarterly finance monitor commissioned by the British Bankers’ Association’s (BBA’s) Business Finance taskforce.
The not-for-profit Forum is calling for measures to restore trust in banks and help alternative funding platforms compete in finance markets dominated by mainstream lenders, following figures suggesting confidence and trust in these is in decline.
According to the report, published today, a total of 15% of SMEs – or approximately 670,000 firms – needed funding during the past year but did not apply for it.
Even more – almost one in five small businesses (18%) – believe they will need finance in the next three months but feel they will be unable to apply for it unless economic conditions improve markedly.
“This independent report is helpful in clearing some of the fog of war we have seen in recent years between businesses and banks,” said the Forum’s Senior Policy Adviser Alex Jackman – Small businesses are clearly experiencing a crisis of confidence in the UK’s banking system.
“While we need policies and practical measures to restore trust in the banks we also need to pave the way for innovative, alternative funders to compete in the finance markets they dominate.”
While the ‘current economic climate’ is seen by respondents as the main barrier to borrowing it is followed by ‘discouragement’ – either direct discouragement following an informal inquiry at a bank, or discouragement of a more indirect kind because a refusal had been expected.
One in three would-be overdraft applicants (34%) and more than half of all would-be loan applicants (54%) felt discouraged. Other barriers were the process of borrowing (for example cost and time issues) and the principle of borrowing, with fear of losing control of businesses cited by some.
Just 51% of SMEs are presently using external finance – significantly fewer than in 2007 (69%) and 2004 (81%), according to Cambridge University’s Centre for Business Research. For larger SMEs employing 50-249 staff this figure is 81%.
Out of the 19% reporting a borrowing ‘event’ in the past 12 months 15% said they had applied for new or renewed lending facilities. While 4% chose to reduce or pay off a loan, overdraft or both in that time or even more (5%) reported it was their banks which cancelled overdrafts or re-negotiated borrowing.
According to the report, most lending requests were agreed. In all, 72% of overdraft and 59% of loan applicants ‘got what they wanted straight away’. At the end of the process 85% of overdraft and 66% of loan applicants had a facility.
However, the figures from market research agency BDRC Continental show that certain types of SMEs are less likely to have been offered what they were seeking.
These included some smaller employers and sole traders, those seeking new rather than renewed funding and firms less than 10 years old, as well as those with a ‘worse than average’ external risk rating. In all, one in five (19%) small businesses intend to apply for new or renewed funding in the next three months but 63% believe they will not need to.
Attitudes to lending are very different between successful and unsuccessful applicants. While 79% who were successful believe their application has been considered ‘fairly’, just 20% of unsuccessful applicants feel the same. In all, 10% of successful applicants believe another bank would have been more favourable to them and 27% of unsuccessful applicants feel the same.
Mr Jackman added: “Banks have to work harder to better communicate the lending process to their customers and, at the same time, improve their infrastructures so that they can gauge lending risk more accurately.
“Lenders should also be helping their customers to produce and present financial information in a way that establishes their creditworthiness – and, certainly under the taskforce’s own appeals process, be pointing them towards alternatives if they feel they cannot meet their needs.”
As part of its Finance Director business support solution the Forum is working with the peer-to-peer social lending platform Funding Circle and FundingStore.com, a one-stop-shop for commercial finance.
According to FundingStore.com’s recent lending ‘index’ survey, 40% of its business has been from start-up companies. The organisation’s founder, Nick Montague, confirmed that many of the funding issues at present affect new businesses more than others.
“The main issue in my view is currently with start-ups. They really struggle to find funding, and there are lots of great ideas – and great brains – that are being wasted due to a lack of funding. This is not really the banks’ fault – their products don’t really suit start-ups as there is generally no security provided.”