CFI: News Review
Government needs to provide a much needed helping hand
by Rob Lankey, head of lending, Aldermore Commercial Mortgages
mervyn King’s recent pro- nouncement that the uK economy faces a ‘choppy recovery‘ over the next two years, will have done little to engender confidence amongst the uKs many thou- sands of small and medium sized businesses. the Bank of england has
lowered its growth forecasts and is now predicting that the economy will grow by less than 3% in 2011, down from it previous forecast of 3.5% and has warned that inflation will remain higher for longer than previously anticipated. King said that a lack of bank lending will limit economic growth, com- menting that ‘it will take many years before bank bal- ance sheets and fiscal posi- tions return to anything like normal‘. He continued with the salutary warning that ‘in the meantime they will act as headwinds to the recovery’. and just in case the mes-
sage had not sunk in, mervyn King concluded by say- ing that it would be ‘several years’ before the economy adjusts ‘back to anything we can call remotely normal’. the problem the economy
faces is that as it is trying des- perately to pull out of reces- sion, government spending is being cut back and we can- not therefore rely on major capital projects to boost the economy. this time around it will be up to British business to trade us out of recession,
but unfortunately businesses both large and small are be- ing given precious little help by either the government or banks. if small and medium sized
businesses are going to come to our economic rescue, a bit like the little ships in the retreat from dunkirk, then they need access to finance. cash is king and without it, the wheels of commerce will very quickly seize up. un- fortunately, all the evidence shows that small businesses are being starved of cash at the very time they need it most. Bank of england statis- tics confirm that net lending to uK businesses fell by £3.2 billion in quarter one 2010, with gross lending falling by 38.8% in the same period and from £43.3 billion in quarter one 2009 to just £26.5 billion in quarter one 2010.
Balance sheets under strain the problem, as mervyn King has pointed out, is that bank balance sheets con- tinue to be under strain and, as a result, they are declining loan requests from perfectly good business customers. For example, the number of complaints made against all financial services provid- ers by small businesses has rocketed by 43% in the last 12 months, from 3,252 in 2008/09 to 4,656 in 2009/10 (up to march 31 2010). and when it comes to loans being granted by banks specifically, the number of complaints being made by small busi- nesses to banks has rocketed by 119% over the past 12 months, with 496 complaints being made to the Financial ombudsman Service (FoS)
44 mortgage introducer SEPTEMBER 2010
as opposed to 226 complaints during the previous year. un- fortunately, these complaints may only be the tip of the iceberg, as only businesses with an annual turnover of less than €2 million euros (approximately £1.8 million) and fewer than ten employ- ees can complain to the FoS.
Throttling behaviour Small businesses are clearly not happy with the treatment they are being given by tra- ditional banks. We hear on a regular basis about sound businesses being told by their bank that they are not going to renew their loan fa- cility, or that they will do so but charge a large fee for the privilege. Small business- es are quite literally being throttled by their banks. one of the government-
backed initiatives which is supposed to encourage banks to lend more to small busi- nesses is the enterprise Fi- nance guarantee (eFg) loan scheme. under the scheme the government guarantees 75% of the value of lend- ing in an individual loan, meaning that banks should be more willing to lend. However, the eFg scheme is capped at 9.75% of total funds lent out by each bank. So if a bank makes 10 loans for £100,000 each (£1 million in total), it’s guaranteed for £75,000 if one loan defaults, but if several default, the bank would be left without any guarantee once £97,500 is reached. this mechanism compares unfavourably with the Small Firms Loan guar- antee (SFLg) scheme, which the eFg replaced. under the old SFLg there was no
claims cap, meaning lenders were much better protected in the event of defaults.
Encouragement as a result, lending under
the eFg scheme has fallen by 20% in the last quarter and from £186 million in quarter one 2010 to just £149 million in quarter two 2010. over the past year, lending under the scheme has fallen by 59% from £254 million in quar- ter one 2009. the scheme is clearly faulted and is not do- ing the job it was intended to do. the government needs to act quickly to repair such schemes, if it has realistic expectations that small and medium sized businesses are going to be the engine that drives recovery. Likewise, government needs to do more to encourage tradition- al banks, particularly those that remain largely state owned, to do more to sup- port small and medium sized businesses. the big banks were largely responsible for causing the recession and, if nothing is done, they may end-up being the reason for the recovery stalling. at least new banks such as
aldermore, which are well capitalised and which are unencumbered by legacy issues from the past, are playing their part in help- ing small and medium sized business get back on their feet. However, we have to be realistic and accept that we are not big enough by our- selves to make the type of step changes that are clearly needed. that’s where government
needs to provide a much needed helping hand.
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