Bank lending to SMEs is caught in a loop which needs to be broken if economic recovery is to return to the UK, warns Johnathan Dudley, Midlands Managing Partner of national audit, tax and advisory firm, Crowe Clark Whitehill.
He said the real funding gap which is holding the country back is in the £500,000 to £2 million bracket.
In addition, Mr Dudley said that cutting interest rates does not stimulate growth as businesses in the SME sector invariably have to pay a premium to borrow in any event.
“Businesses with a decent business plan should not be sensitive to a one per cent interest rate movement in either direction. The real issue is that banks are simply not lending to SMEs unless the directors are prepared to sign onerous personal guarantees often backed by their own homes,” he said.
“There is often the timescale issue as well, with proposals taking months to be considered by credit committees, whereas in the past they would have been negotiated with the local manager and authorised by the area office.”
He said that other funding sources such as private equity tended not to kick in at a level below £10 million.
“Take for example a company with a turnover of £5 million and a good track record seeking to borrow £500,000. This size of deal is not really appealing to private equity houses or venture capitalists.
“Similarly, it is in territory where the banks are reluctant to lend, as they are now seeking heavy duty collateral as security.
“On the one hand, the banking hierarchy are no longer prepared to take what they see as a ‘gamble’ with SMEs. On the other hand, small business owners do not see why they should be required to pledge their homes for a £100,000 loan, when if they were directors of a large company asking for £100 million, they would not be required to make any such commitment.
He added that some banks sometimes pay lip service to Government initiatives such as Funding for Lending, the National Loan Guarantee Scheme and the Enterprise Finance Guarantee, but in reality they have not been keen to take up these options because of poor repayment records in the past.
“I suspect the banks feel that what they perceive as a lack of commitment on the part of the client, is more likely to raise the spectre of default on a loan – although they would not advertise the fact,” he said.
“The economy is clearly stagnant and if, as some commentators have speculated, this is the new ‘normal’ then clearly we have to do something to break out of the loop and get SMEs, the engine room of the UK economy, back on the path to growth.”
“Capital funding is available. Working capital to use those capital assets is much harder to get. Without it, the SMEs cannot grow. This is a situation which cannot continue if the UK economy is to return to growth, as this is exactly the kind of funding that buys the equipment which stimulates growth at the sharp end,” he said.
Mr Dudley was recently reappointed as Chairman of the Alliance for the Black Country, and Vice Chairman of the Black Country LEP, Access to Finance Group.
