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The state of access to bank finance

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24th Apr 2014
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The government's entrepreneur-in-residence Lawrence Tomlinson reflects on whether the economic upturn is having an impact on businesses' access to finance.

Originally appearing in our sister title BusinessZone, Tomlinson questions if the banking marketplace is capable of offering sustainable lending to businesses.

Tomlinson explained that the last five years have been difficult for businesses and the pendulum has been swinging between messages of “banks are not lending” to “businesses don't want to borrow”.

“When I joined the Department for Business, Innovation and Skills as entrepreneur-in-residence, I wanted to get to the truth of these mixed messages. The press were constantly reporting that banks were lending and ‘nine in 10 loans are approved’ but as soon as I spoke to businesses they told me that access to finance was a nightmare.

“My concerns about pre-application screening were soon confirmed when Sir Andrew Large published his report into RBS' SME lending practices. Far from 90% of loans being approved, he found that when screening was taken into account, it was more like a 27% approval rate. More concerning still, my own investigations concluded that some banks, RBS in particular, were aggressively removing funding from businesses,” he said. 

The findings of the Tomlinson Report have been well reported and the FCA is currently investigating the key allegations. 

In March the OBR revised up its forecasts to 2.7% growth for 2014. 

“There is certainly much more confidence in the market and people are feeling better about the UK's economic outlook. Recovery remains consumer-led however. Once PPI claims are all paid out and house prices start to plateau, we need to make sure there is growth in the real economy to sustain a positive trajectory. Supporting manufacturers and exporters to expand will be key to this. The ONS reported a 1% growth in manufacturing output in February 2014 but the sector as a whole remains 8.2% smaller than it was in 2008.”

Tomlinson explained that access to finance was as important to businesses as any other utility, especially during a business' growth phase.

“If we are to get the engine of the UK economy gathering momentum again, we need to target finance directly at these powerhouse firms, giving them the tools to expand and invest. This means having active competition in the banking market place, driving good deals and outcomes for businesses. Competition not only provides more available products to these businesses but generates more trust as the customer has more ability to move between providers if they are unhappy with their service.”

Despite efforts to increase competition, the market is still dominated by a small number of large players. In the SME market, 50% to 60% of all lending is from the two government backed banks -Lloyds and RBS.

“This has an impact on prices and consolidates the market so there is little choice. It distorts the market and any particularly successful challenger finance provider runs the risk of take over,” Tomlinson explained. “Part of the difficulty with securing finance for a growing business is that their EBITDA will reduce. This does not mean the business' performance has worsened, but is simply a reflection of the increased investment in the business. This creates problems for banks who base their credit approval on computer based models as they can only input values, which don't necessarily reflect the strength of the business.”

He added that the person best placed to judge the appropriateness of lending is the local relationship manager.

“The dilemma between internal regulation of banks' credit approvals, and making good lending decisions, cannot be reconciled when banks have grown to such a size – the centre is simply too far from the decision making process. It is therefore unsurprising that smaller and more reactive banks, such as Handelsbanken, receive such positive reports of their lending decisions. We need more banks like this to truly get access to finance flowing.”

Businesses remain nervous of increasing borrowings for the fear of repercussions if something goes wrong and those who generate UK growth may already be operating well under their status-quo in a profitable and safe position, Tomlinson said. “Growth requires foresight and an element of risk.”

The business community see that the banks have 'got away' with what happened in 2008, what is to stop them acting against the interest of the UK economy again? he asked.

“If the big banks were small enough to fail, not only would this create a more vibrant banking market place, giving businesses a choice of providers, it would also increase confidence that there is a downside to banks' behaving badly.” 

The state of the market

Tomlinson said access to finance is improving.

“We are seeing growth and more confidence in the market with more businesses now preparing to increase investment. However, we must not get complacent. There is no discernable change in the banking market place to prevent 2018 becoming the next 2008. 

“Businesses are not ignorant of this so trepidation will remain and growth will continued to be stifled until we see real change in the banking market. This requires breaking up the big banks to make sure we have a varied and responsive banking landscape that can fulfil business needs, be more accountable and demonstrate sustainability and stability for the long term.”

Last year Tomlinson accused banks of displaying disturbing patterns of behaviour towards small businesses which impede lending.

The adviser presented a dossier to business secretary Vince Cable which revealed many businesses had been “deterred from accessing finance before even being given the chance to apply”.

The report also suggested that statements such as “9 in 10 loan applications are accepted” were extremely misleading.

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By johnjenkins
24th Apr 2014 14:25

Why do you

even contemplate believing what the banks are saying? It's been a mess ever since Maggie got kicked out.

This is a country of "boom and bust" and nothing has changed. We've had the bad bit, hopefully we will be coming out of the EU shortly which will give us the "boom" especially with a lot of outside investors.

Give it 10 - 15 years and we will be in the same position that we were a few years ago. John Major and Gordon Brown tried hard to "control" growth, but, in this country, it is impossible to do that.

The reason is simple. We are individuals and as such compete on a personal basis rather than a corporate one. Europe works on a different system. I didn't realise how much the difference was until a couple of clients went into Europe in a big way.

What the banks have been trying to do is to stop the individuals who make a fortune, create jobs, but then go under. How does that song go "pick yourself up, dust yourself down. and start all over again.

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