Access to Finance: a bleak picture for banks and businesses alike
Growing Business picks the bones out of the new ONS report
If anyone doubted the scale of the challenge facing businesses seeking credit from the banks, they should take a look at the latest report issued by the Office of National Statistics (ONS).
The report, entitled Access to Finance, clearly demonstrates that businesses have found it increasingly difficult to secure funding in recent years, and the problem has been particularly acute among the ‘gazelles’ – young, fast-growing businesses regularly championed as the lifeblood of our economy.
Far from encouraging our most dynamic companies, the report would appear to suggest the banks are stymying their growth – often rejecting their credit applications without giving any reason for doing so. For those attempting to build bridges between bankers and entrepreneurs in the wake of Project Merlin, there is clearly huge ground to make up.
Surge in demand
Contrary to the banks’ oft-repeated claim that lack of demand is a major reason for low lending rates, the researchers found that credit applications have risen dramatically in recent years. In fact, between 2007 and 2010, the number of small firms seeking credit rose from 35% to 42%.
The rise in demand was most pronounced among the gazelles – companies which, under the terms of the ONS research, were founded after 2002 and grew at an average annual rate of 20% between 2005 and 2008. In 2007, 38% of gazelles sought credit; by 2010, this had risen to 47%.
In terms of the types of funding being sought, the study found that small firms are more likely to apply for a loan than equity or other forms of financing. Furthermore, banks remain their most common target – accounting for more than three-quarters of all loan applications in both 2007 and 2010.
However, the success rate of loan applications has dropped dramatically. In 2007, around 90% of loan applications made to banks by small businesses were successful; by 2010, this had dropped to 65%.
Although success rates have fallen in other major European countries, the rate of decline has been far less steep. In France, for example, the proportion of successful credit applications fell by 9% between 2007 and 2010. In Germany, the figure was 11%.
At a time when the British government is desperately trying to galvanise the small business community, and enable UK start-ups to compete on an equal footing with their continental neighbours, these figures only provide cause for more concern.
Particularly alarming is the sharp decline in successful applications made by gazelles; the drop in success rate has been sharpest among companies in this bracket. In 2007, 90% of gazelles had their bank loan applications approved. In 2010, this figure was just 50%.
Many believe that the current lending system mitigates against gazelles, as they lack the resources and track record to meet the banks’ criteria. Stewart Baird, of small business venture funding company Stone Ventures, told Growing Business:
“Whatever they say to the contrary, the banks simply aren’t lending in the way they say they are. Unless companies have significant assets and security, the high street banks won’t touch them. Even if (small firms) do get offered a loan, the terms are often so prohibitive that they are better off without it.”
Lack of reason
Perhaps the most damning statistics concern the reasons given by the banks when rejecting applications. Despite lenders’ protestations that they go through each application in forensic detail, the ONS report suggests hundreds of companies are being given a slapdash service from the banks they apply to.
When the researchers asked respondents why the banks had rejected their applications, they found that the number of companies which received no explanation whatsoever increased almost two-fold, from 8% in 2007 to 15% in 2010.
Several experts have already condemned this increase. Christopher Shaw, of small business finance specialist Platform Black, told Growing Business that “there can be no better reflection of the reduced appetite of the high street lenders” than their refusal to provide a genuine reason for loan rejections.
Others have responded to the figures by demanding sweeping changes. Lord Oakeshott, former Treasury spokesman for the Liberal Democrats, was quoted in The Guardian as saying that “the banks and the Treasury now have nowhere to hide”. Oakeshott’s acerbic view is surely shared by many within the small business community.
The other side to the story
However, before we rush to join in the condemnation, it’s important to consider the strides made by the banks in recent months. Following February’s Project Merlin agreement, a ground-breaking compact which set out clear lending targets for Britain’s banks, the major lenders have created several new initiatives to improve access to finance for small firms.
For example, this week Lloyds has secured a £150m injection from the European Investment Bank, facilitating the provision of discounted loan rates for small firms. Meanwhile RBS has introduced what it describes as “historic low rates” for small business lending, and HSBC has unveiled a ‘Business Growth Grants’ competition, offering small businesses the chance to win £50,000 of non-repayable funding.
When Growing Business spoke to Barclays Business’ Travers Clarke-Walker about the bank’s lending levels recently, he said: “It’s vitally important we achieve the Merlin target for companies with growth opportunities. At the half-way stage of Merlin, Barclays has lent £20bn, £7bn of which has been into the small business sector.
“We’re lending more to small businesses than ever before. We have our highest customer base since records began in 1988, with 780,000 customers. And, following discussion with our relationship managers and a system check-up, four out of five applications for lending are successful.
“It’s undoubtedly a slow road back. It will take a while to foster confidence, but judge us by what’s happening in branches, with our relationship managers and business customers.”
As Clarke-Walker says, there’s still plenty of work to do to build bridges; small businesses have every right to feel aggrieved about the lack of lending in recent years. However it’s still very early days in the Merlin agreement, and it may be months, even years before we see its true results.
Small businesses have clearly been harshly treated since the recession began. But, if the banks continue doing what they’re doing, they may one day be back in credit with Britain’s entrepreneurs.