Tag Archive | "lending"

SME lending still short of Project Merlin target

Project Merlin was supposed to get the major banks lending more money to small businesses, but so far it is falling short of its target.

Despite being behind target at the end of Q2, gross lending to SMEs actually decreased in the third quarter; down from £20.5 billion to £18.8 billion.

In February, the Big 5 banks promised to lend £190 billion to businesses this year. £76 billion was to go to SMEs with a turnover of less than £25 million.

Although the banks should meet the headline commitment of £190 billion, they have only lent £56.1 billion to small businesses – 0.9 billion short of the nine-month target. According to the banks, businesses simply don’t have the appetite for loans.

Business groups are now concerned that the lack of competition in the banking sector is having an adverse effect on the cost of credit.

John Walker, the FSB’s national chairman, explained that the big five banks serve around 85% of the small business community. As well as more competition, small businesses must be able to access new lines of credit otherwise they will not be able to help the economic recovery.

Andrew Haldane, the executive director of financial stability at the Bank of England, has called for a relaxation of the rules surrounding lending to small businesses.

He says lending should not be so capital-intensive, and the calculations for risk weightings should be relaxed. The current system of weighting assigns higher levels of risk during a crisis and this compounds the credit shortage. Banks should be able to free up credit from their capital reserves, he added.

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Contractors think banks lack common sense over lending

Contractors may have already encountered difficulties trying to obtain finance from their bank.

Shawbrook Bank has now published research findings that confirm that the leading UK banks are making it too hard for small businesses to get a loan.

45% of SMEs say that the level of bureaucracy is too high and a mere 6% think the process they have to go through when they apply for a loan is transparent. Furthermore, 89% of respondents said the banks lacked common sense when it comes to lending.

The CEO of Shawbrook Bank, Owen Woodley, said smaller forms should be receiving as much assistance as they need to help them grow and become successful. It’s a matter of grave concern that so many of them feel the loan application system is unclear and obstructive.

It is vital for a small business to be able to access the right finance when they need it if they are to expand and in order to achieve that we must have a lending process that is straightforward and efficient.

Shawbrook recently promised that it would make £250 million available to UK small enterprises next year.

Another problem facing small businesses is that credit agencies appear to have very different ways of assessing credit worthiness.

A recent study of the credit reports of private firms discovered a 150% average variation rate in the credit limits recommended by three high profile agencies. Although agencies do use different criteria to base their scores on, the size of the discrepancies is causing concern.

Phil McCabe from the FPB pointed out that a flawed credit report could mean the difference between success and failure for an entrepreneur.

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EFG has £600 million to lend, so why isn’t it lending?

Syscap, the independent finance provider, has said that lending under the Enterprise Finance Guarantee scheme fell by 42% over a 12 month period.

In the year ending June 2011, only £433 million was lent under the EFG scheme, compared to £742 million in the year to June 2010. Between April and June this year, just £93.1 million was offered to SMEs and accountants for contractors under the scheme. In the comparable quarter of 2009, £254.9 million worth of loans were offered.

The government has allocated £600 million for additional lending in the year ending 31 March 2012 but if the current trend continues, it is unlikely to reach that target.

One problem appears to be that the EFG scheme does not fund SMEs through lease financing. Leasing is crucial to many small businesses as it allows them to maintain a healthy cash flow, spread the cost of assets and is tax deductible. However, the EFG does allow invoice financing, which is a form of asset finance.

Philip White, Syscap’s chief executive, said the EFG scheme urgently needs to increase lending if we are going to get the economy back on track and create jobs. But it looks highly unlikely that the scheme will lend all of the £600 million it has available if the first quarter lending figures are anything to go by.

Meanwhile, the FSB has welcomed the Independent Commission on Banking’s recommendations for the reform of the sector and is now calling on the government to implement the recommendations before the end of this Parliament.

The ICB has proposed that retail banking operations are ring fenced from the more risky investment banking activities. 89% of FSB members think that the UK banking system needs to be reformed. 52% believe it should happen immediately, whilst 45% say reform should take place by the end of this Parliament.

John Walker, the national chairman of the FSB, said the ICB’s recommendations could make the banking sector more secure but the government must resist the temptation to water them down.

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Slight increase in SME funding but it’s still not enough

The SME community is still having problems raising funding and at the same time has to cope with increased costs, Adam Tyler, the chief executive of the National Association of Commercial Finance Brokers, said recently.

The latest survey from the NACFB shows that although funding has improved slightly, it is still very difficult for SMEs, including accountants for contractors looking to grow, to access. Funding is now coming in a variety of different ways and from a wider range of lenders, he said.

In the past twelve months, there has been a 3.5% increase in asset finance and a rise of slightly over 6% in commercial and sme mortgages. But short-term lending shot up by a massive 180% over the past year. Asset finance brokers have been struggling to find funders, but more smaller lessors have entered the market.

The number of companies using invoice finance increased for the fourth year in succession and this shows that businesses are looking for more cost effective ways of borrowing. Although 90% of small firms bank with the four major high street names, they are looking to alternative sources when it comes to borrowing.

Members of the NACFB have access to nearly 70 providers of business finance, Tyler explained. Companies do want to grow and they do want to borrow and yet a recent survey shows that only 16% of SMEs have asked their banks for funding, and of those, one third were refused.

David Connell from the Cambridge Judge Business School says that the government treats small businesses as an afterthought when allocating innovation funding and it should adopt a similar system to the US where projects receive 100% funding.

He explained that the 50% of costs allocation given to small firms isn’t appropriate as they are cash poor and lacking in venture capital.

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Small businesses lose faith in the UK’s banks

Britain’s sole traders and contractor accountants have lost faith in the country’s banking system, according to the Forum of Private Business.

The FPB is now calling on the government to introduce new measures to restore smaller enterprises’ trust in banks.

The British Bankers’ Association recently published research showing that about 670,000 UK firms have needed funding in the past 12 months but did not submit an application for it. 18% of companies believe they will require finance within the next three months but say they will not be able to apply unless there is a significant improvement in the country’s economic conditions.

The FPB’s senior policy adviser, Alex Jackman, pointed out that the report showed that small businesses have a crisis of confidence when it comes to the banking system in the UK. As well as practical measures to restore confidence, innovative funders must also be allowed to compete in the current bank dominated finance market.

The Bank of England published its Trends in Lending report for May recently and it showed a record decline in the number of approved loans for smaller enterprises. It also stated that the average interest rate payable on small business loans is 4.66%. Two years ago, the rate was 4.29%.

John Walker, the national chairman of the FSB, said that entrepreneurs and limited company contractors should be able to take advantage of healthy competition from the UK’s banks. He pointed out that the 4.8 million small businesses in the UK are the ones that will create jobs and drive the economic recovery, and yet they are getting a worse deal than their larger counterparts.

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Could a new bank be the small business saviour?

Contractor accountants may be interested to learn that Vince Cable, the business secretary, has once again called on the UK’s high street banks to increase lending to small businesses.

Under the terms of the recently signed Project Merlin agreement, the UK’s major banks must lend £19 billion to small businesses each quarter. However, in the last three monthly period, only £16.8 billion was lent to small firms and this led to Cable saying the banks must put more effort into small business lending.

He went on to say that if the banks don’t stick to their agreement, the government may rescind its promise and change its tax regime, which currently favours the banking sector.

Small businesses who fail to get loans from the major banks may want to consider approaching the Metro Bank.

The newest high street banking player said that business banking managers are available to 43% of larger organisations, but only 16% of micro SMEs. The bank also points out that 29% of larger firms are likely to be accepted for a loan compared to just 2% of micro firms.

The managing director of business and commercial banking at Metro Bank, Mark Price, said it was clear that the banks are letting down small businesses. He went on to stress that all businesses, irrespective of size, are welcomed at Metro Bank.

Price also explained that the Bank focuses on local community based banking which means lending decisions are made by local managers who understand the relationship individual businesses have with the Bank.

Metro Bank recently opened its eighth branch and within the next ten years it hopes to have more than 200 branches in Greater London.

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Would local lending decisions benefit growing contractor accountants?

Following the news last week that the big banks could miss the SME lending targets agree by Project Merlin, the Forum of Private Businesses called for better competition, local bank managers to have lending powers and more investment in regional branches.

The chief executive of the FPB, Phil Orford, said the Forum wants banks to invest and regional services and give local bank managers the power to make lending decisions as they are best placed to understand individual local companies, which could include accountants for contractors. The current over-centralised, tick box mentality must go, he added.

The Project Merlin banks released a joint statement claiming that demand for small business funding has declined. However, the latest survey of small businesses from the Department of Business, Innovation and Skills discovered that over a quarter of SMEs looked for finance last year and just over half of them had difficulties getting funding from the first institution they went to.

Orford went on to say that regardless of the banks’ comments, there is still a pressing need for affordable funding. The main problem is that mainstream lenders are increasingly alienating small businesses. The big banks dominate and this has led to a lack of competition. Although there are a few innovative funding platforms, they are struggling to break into the market.

HSBC has said it is willing to welcome firms with viable propositions. In fact HSBC’s head of small business banking, Huw Morgan, said the bank would like to see more companies asking for funding.

He went on to say that businesses are now feeling more positive about their ability to grow. A lot of firms are scrutinising their customer base to see how they can expand by entering new markets and offering more.

Morgan finished off by saying that the bank will fund firms that have done their research and have a clear business strategy.

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Corporate insolvency regime consultation launched

A consultation has been launched by the Insolvency Service into the Office of Fair Trading’s proposals for changes to the regime governing corporate insolvency.

The Market for Insolvency Practitioners in Corporate Insolvencies report was published last June and recommended changes to ensure creditors received the best outcome.

Edward Davey, the minister in charge of the insolvency regime, said the consultation was of great significance to anyone affected by insolvency, including accountants for contractors, as it contains proposals to set up an independent complaints body. It is an opportunity to comment on how the government can make sure unsecured creditors get a fair deal when a company goes under.

In addition to the complaints body, the consultation considers reform to the regulatory framework and amendments to the legislation concerning administration and liquidation.

Insolvency Practitioners Association chief executive, David Kerr, said he particularly welcomed the proposals to set up the new complaints body.

Philip King, from the Institute of Credit Management, also welcomed the consultation saying that any initiative that improves the outcome for unsecured creditors has to be applauded.

The president of R3, the insolvency trade body, whilst welcoming the consultation, said he thought unsecured creditors wanted to take a more active role in insolvency proceedings. He pointed out that they have the ability to influence decisions but rarely get the opportunity to engage in the process.

When a company goes under it is very unusual for there to be enough money left to pay all the unsecured creditors. This leads to frustrated unsecured creditors but does ensure that secured creditors will continue lending, he added.

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Should bank bonuses should reflect lending performance?

Project Merlin, the project launched last year to secure consensus amongst the leading UK banks regarding financial issues including lending to small businesses and bonuses, is likely to lose the support of Spanish banking giant Santander.

It has been reported that Santander is eager to reach a unilateral agreement over lending directly with the Treasury. It is thought that the bank does not consider Project Merlin as relevant to it since it is currently aggressively increasing the amount it lends.

Santander becomes the second bank to leave the Project after Standard Chartered’s decision last November. Like Santander, Standard Chartered believes Project Merlin is not relevant to it.

The question of bonuses was raised in the Commons question time last week as MPS complained that banks were not lending to struggling SMEs.

Conservative MP, Philip Hollobone, told Vince Cable that a businessman claimed to have been ordered by Barclays Bank to pay a yearly fee of £25,000 because of “spurious new audit requirements”. Barclays lied to the man and the chief executive should not be awarded with a bonus, Hollobone said.

In reply, Cable said that it would be helpful if bonuses reflected performance in lending. But that’s exactly why George Osborne and I are discussing ways of ensuring that the UK’s excellent enterprises have access to a proper flow of credit, he added.

The government began talks with the banks on acceptable bonus levels before Christmas but there are increasing concerns that mammoth bonuses are set to return now that the recession is over.

John Denham, the shadow business secretary, accused the coalition of giving in to the banks. He pointed out that SMEs and limited company contractors are still struggling to obtain credit and even if they do get it, it is too expensive. He asked why taxation on banks is being cut when the chief executive of Lloyds is reported to be receiving £2 million after leaving his position.

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There’s been a welcome drop in small business insolvencies

The August Insolvency Index from Experian shows that the amount of businesses going under has reached its lowest point in over three years.

The Index dropped to 0.07 and the average financial strength rating increased by 0.27 to 81.06 over the last 12 months.

Contractor accountants will be particularly interested to learn that smaller businesses did very well. Their strength rating stands above the average at 82.22, an increase of 0.9 on the previous year.

The managing principal of pH, one of Experian’s companies said this shows just how quickly business fortunes can change. The present picture is very different from that of six months ago when insolvencies were increasing.

The figures also reveal that things in the North East improved. In June the region had the highest rate of insolvencies but by August the North East shared a rate of just 0.06% with six other regions.

This welcome news for SMEs is all the more surprising when you consider that the banks are still reluctant to lend to small businesses.

On a less positive note, research published on Monday showed that individuals living in towns situated on the coast were more likely to be declared insolvent than their inland counterparts in 2008 and 2009.

Last year in Hull, 51 out of every 10,000 adults were declared insolvent compared to just 20 per 10,000 in London whilst insolvency rates in Blackpool, Plymouth and Eastbourne were not far behind.

Despite more people taking staycations during the recession, coastal towns have never really recovered from the days when they were thriving fishing ports or shipbuilding centres. And a lot of people who live in these towns have to rely on seasonal or part-time employment so their income is more erratic then full-time employees.

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Choppy recovery but little risk of a further credit crunch

The August Inflation Report from the Bank of England, which was published yesterday, was not as optimistic as contractor accountants might have hoped.

Mervyn King, the Governor of the Bank of England, warned that the economy faces a choppy recovery over the next couple of years. The Bank has said they expect inflation will remain higher for longer than they had previously anticipated and this has led to a lowering of the economic growth forecast. The report also suggests that interest rates will remain at their historic low in the immediate future.

Previously, the Bank had expected to see growth of around 3.4% in 2011 but this has now been revised to around 2.5%. The main reason for the revision is the coalition’s decision to increase the VAT rate to 20% as from the beginning of next year.

Mr King pointed out that the continuing economic stimulus measures along with the drop in value of the pound were helping the economy to expand but this is being offset by the lack of lending from the banks, something that affects contractors.

However, King did stress that the cost cutting plans put in place by the government have reduced the risk of a double dip recession.

Economists were quick to comment with some saying the report was more ‘dovish’ than had been anticipated. Howard Archer, from IHS Global Insight, said the report reinforced their view that interest rates will remain at 0.5% until early in 2011. He forecasts that we will not the first rise in rates will until the summer next year.

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