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Tyranny of the majority? What's really wrong with business lending.

21st Aug 2013
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The perceived lack of business lending, done to death by press, politicians and lobbying groups is - as is often the case - actually very nuanced, and for firms that fit standard bank lending criteria, the days of severe credit rationing are long gone. Our daily experience is that it's now a minority of firms struggling with finance, focused on a finite number of product 'hotspots'; here's my starter for ten:
  1. Term loans - Being typically 3~4 years in length and largely unsecured, term loans rely heavily on recent operating performance: a sympathetic view of banks would be that a tough five years of trading means that far fewer firms meet lending criteria than before; the good news is that there's data to suggest many firms are beginning to turn the corner, so we may well say an uptick in lending as a result.
  2. Development finance - There is no question that areas of commercial property such as buy-to-let, development finance and property investment collapsed in 2007 after an unsustainable boom (even RBS have been open about a lack of appetite here); going forward, the good news here is that there is unquestionably renewed appetite from specialist lenders, some of which have even 'come back from the dead'.
  3. Working capital finance - There is a very large and pressing gap between overdrafts and invoice finance, where the former are too small and unstable, and the latter too opaque and burdensome for many small firms; solving this with technology is crucial for many high-potential firms.
  4. Short-term business loans - If a firm unexpectedly ask their bank for more money, their bank will often assume something is wrong, when the reality is that even stable, well-run businesses have unanticipated cash needs such as equipment repairs or large contracts: the good news is that some excellent new products have arisen to fill this need, particularly where a fast business loan is needed.
In terms of solutions, I think there are two related themes which do not get enough focus in government policy:
  1. How to bridge the gap between millions of small firms and 100+ specialist lenders that typically have much more flexible and aggressive lending criteria than the 'sausage factory' big banks; this is something we're very focused on at Funding Options.
  2. A lack of competition in UK SME banking, which leads to a situation where our dominant 'big four' banks have 'one-size-fits-all' propositions for as diverse sectors as freelancers, hauliers and dentists; this is clearly wrong.

I'd love to hear what you think about this critical issue.

/ by Conrad, MD of Funding Options

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By User deleted
22nd Aug 2013 09:16

There is also the fact ...

... many firms moaning about not getting finance are not good risks, and it was lending to these sorts of firms that got us in the smelly stuff anyway.

Unfortunately this now makes it harder for good risks to get finance, but I for one don't want a return to indiscriminate lending.

A profitable company with a well structured business plan will find it fairly easy to obtain finance for expansion/asset renewal etc.

 

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