SME bank lending report highlights crisis of confidence

It's clear from a new independent-ish report on bank lending that many SMEs are being scared off the borrowing process altogether...

by James Taylor
Last Updated: 19 Aug 2013
Whose fault is it that banks are failing to meet their SME lending targets? Businesses claim the banks aren’t doing enough; banks claim the demand just isn’t there. Well, according to a new independent report, the truth lies somewhere in the middle: the majority of overdraft and loan applicants are getting the cash they need, but there’s a substantial number that haven’t even bothered trying, either because they’re nervous about borrowing in the current climate, or because they expect to be turned down. That’s not great news for the UK’s growth prospects…

This new report was commissioned by the British Bankers Association but compiled by research house BDRC Continental, based on a survey of over 5,000 firms with fewer than 250 staff. So it has a reasonable claim to be able to provide some definitive answers to the (slightly wearying) tit-for-tat about whose fault the current situation is. Naturally, the banks have been keen to highlight the good news: all told, 72% of overdraft applicants and 59% of loan applicants got the facility they wanted at the first attempt, rising to 85% and 66% respectively by the end of the borrowing process. So the majority of those who apply for funding are getting it.

However, the bad news is that 28% of small firms who applied for loans were rejected outright – and even if they re-applied with more with more detail or asking for less cash, that figure barely changed. That’s compared with just 4% of firms who were rejected back in the good ole days of 2007. So rejection rates are much higher than they were. What’s more, SMEs were none too impressed by the advice they received; banks have been encouraged to help firms improve their applications, but the report found that the advice on offer was ‘not well rated’ by the SMEs involved.

Perhaps even more significantly, 15% of SMEs (including 28% of start-ups) wanted to apply for money but had chosen not to. In around half of these cases (for loans; the proportion was a bit lower for overdrafts), that was because they felt discouraged from doing so – either directly, when they broached their subject with their bank, or indirectly, because they expected to be turned down. They also cited the cost, time and effort of the process, plus  the risks of borrowing in the current economic climate. In other words, they’ve been scared off.

Some of the findings in this report are perfectly understandable; for example, surely it’s no bad thing that the banks are less liberal with their money than they were in 2007, and surely it’s no great surprise that smaller, younger businesses are finding it harder to get loans than larger, more established ones. But what’s clear is that there’s a general air of mistrust around now when SMEs deal with the banks. So perhaps the most useful thing the Government can do to resolve the current impasse is to think about ways to rebuild that trust…

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