Figures for the second quarter of 2014 from the BDRC Continental SME Finance Monitor that were released yesterday (28 August) highlight the banks' reluctance to lend to growing companies.
One in nine of the companies surveyed with growth intentions for the next 12 months regards the difficulty of accessing finance as a major obstacle and a hurdle equal to problems with cashflow.
37% of small businesses seeking loans were turned down by the banks and were unable to raise the money needed from other sources.
“We’ve become a form filling society. Although the banks do have business managers, they haven’t got a great deal of empowerment and they can’t act on their own gut instinct or use their own entrepreneurial vision, which is what their customers are doing every day. It’s often not how well you perform, it’s how well you do the paperwork and comply,” said BAPC chairman Sidney Bobb.
“The definition of an SME is much larger than the vast majority of businesses in the print industry. Many are micro businesses that don’t have the formality to be able to approach the banks. They’re worried about their credit rating and are afraid of failure and refusal for funding.
“It’s a huge problem and it’s very difficult for them to approach a bank in the way that it wants to be approached, present a project and expect understanding and consideration.”
Only 15% of the small business owners looking to grow this year regard economic conditions as a significant barrier to growth, according to the report.
“The figures show a continued fall in the number of businesses that see the economy as a barrier to running their business, but an ongoing decline in small firms looking to outside sources for future funding,” said chief executive of the Forum of Private Business Phil Orford.
“They also show that almost two thirds of SMEs do not use external finance, and the number of permanent non-borrowers has risen to 40%. It highlights a continuing reversal in the number of businesses looking to the banks.
“A significant number of small firms are choosing to avoid seeking external finance altogether and are looking to use their profits to fund their growth aspirations, which, while a sustainable option, may impact on the pace of recovery.”
Meanwhile, figures released by The Bank of England suggest that the government's Funding for Lending (FLS) scheme is not working.
The scheme, which was launched in 2012 and was designed to improve the flow of credit to SMEs that have had difficulty in obtaining funds by lowering the cost of lending, has seen a decrease in the amount of money lent to businesses, according to the figures.
Net lending to SMEs fell by £435m in the second quarter of 2014, despite efforts to concentrate the scheme more on SMEs, which are seen as key to economy growth.
All business lending by banks and building societies using FLS fell £3.9bn in the period, with the bulk of this coming from lending to large corporations, which was down £3.5bn.
However, lending to non-financial businesses did increase in the period, which marks the first rise since 2009.
“These figures again show that growth ambitions are not being translated into demand for finance, especially for smaller businesses that have not been able to capitalise on cheaper credit,” said Federation of Small Businesses national chairman John Allan.
“While FLS has had an impact on the price of credit, the trend in lending suggests there remain issues with credit allocation through the banks. That is why we believe the Competition and Markets Authority needs to review the market, ensuring that competition is working in the sector and that firms can access the finance they need to grow.
“Alongside the traditional banking market, efforts are needed to scale up and promote alternative finance providers so ambitious firms have other finance options. Government calls for banks to refer rejected loan applications to alternative finance providers is a welcome move. However, these alternative providers need access to credit data so they can make effective lending decisions.”
