One says it’s not being supported, the other says it’s lending plenty. What’s going wrong?
There is a considerable disparity between the advertising messages of UK banks, which proclaim that they are open for the business of small and medium sized enterprises (SMEs), and the reported experience of business owners trying to access bank finance. For many of them, bank lending decisions are a black box of mystery and obfuscation.
SMEs make up 99% of all UK enterprises and employ nearly 24 million people. They represent the most innovative of British businesses, yet if the headlines are to be believed, banks are not interested in lending to them. The government has responded to this fact by initiating a range of schemes to address the finance gap – such as the British Business Bank and Funding for Lending. Yet the problem remains.
We recently commissioned an independent study to the business schools at the Universities of Surrey and Greenwich find out why the money is failing to reach SMEs and to help make sense of the mutual incomprehensibility that exists between them and the banks.
It seems that both sides are at fault. SMEs and banks need to understand one another’s position; it often seems that dialogue between them is lost in translation. Many businesses simply don’t appreciate the risks banks take or understand the regulatory burdens that they face. They don’t understand banks’ loan application processes – including the need to share, and not shoulder, the financial risk.
To be the sort of business a bank wants to lend to, an SME should build up a good credit rating and prepare a realistic business plan that contains hard business facts. They should incorporate expert feedback before submitting it.
Banks, meanwhile, should provide clear details of their loan criteria via a specific checklist, whilst keeping jargon and technical language to a minimum. They should provide SMEs with transparent feedback on loan evaluations and outline how credit history will impact upon their decisions. Information about the application itself should be easy to find, not hidden behind layers of pages on their websites. Banks should also accept that SME owners generally appreciate some personal contact with a bank representative during the loan application process.
Policy makers also have a role to play in addressing the conflicting pressures that operate within the banking sector. The government cannot demand that banks increase their capital, increase lending and reduce the cost of borrowing all at the same time; it is an impossible task.
In view of this, for the British Business Bank to be successful in bridging the divide, the issues of miscommunication that exist between SMEs and the banks must be addressed; or it must consider a new model of lending altogether. With security remaining a key issue for SMEs, a Business Bank designed to lend to riskier projects – for a higher rate of interest, to ensure profitability – could just provide the solution that SMEs struggling for finance need to grow. The research report can be downloaded at www.ks.co.uk/smebankfinance.
Maureen Penfold is a partner at Kingston Smith LLP
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