Tag Archive | "loans"

Small Businesses to be Offered Alternative Finance

Every year there are thousands of small business owners that are turned down for loans, but a new scheme is looking to offer alternative finance.

It seems the mainstream banks don’t want to lend you money if you’re a small business, freelance professional or contractor.

Recent figures show that over £4 billion worth of loan applications are turned down every year, although it now looks as though there is a solution if you are one of those people who just can’t get a loan for your business.

The new scheme, which is being endorsed by the government, will bring small business owners in contact with alternative financing sources, such as online lenders who specialise in bad credit or peer-to-peer lending companies.

My opinion? I think this is a great idea, and long overdue of course, especially when you consider there are thousands of hard-working freelance and contractor professionals who are no being approved for loans.

The figures show that currently only 3% of small businesses who get turned down for a loan seek out alternative financing, but now, with this new scheme and government backing we should be seeing more of the self employed getting the loans they need.

I’ve always said that I think many of the mainstream banks are way out of touch with reality, and some of the criteria they want small business owners to meet in order to get a loan is simply ridiculous. Hopefully, this new scheme will give people the alternative they need to start going away from banks and towards online options that are more with the times.

Even the Chancellor, Philip Hammond agrees with me, as he recently commented, “A refusal from a bank should not be the end of the road for a small business, and thanks to the finance platforms being launched today, now it won’t be.”

This all comes at a time when some of the more well known banks have been getting a lot of criticism for the way they treat small business owners. Well, maybe the tables are about to be turned? Let’s hope so.

One thing to note is that while many small businesses, freelancers and contractors should find it easier to get a loan, that doesn’t mean anyone can get one.

Let’s not go back to the days where being financed was so easy even a new business with no track record could get thousands of pounds overnight, and then a few months later go bankrupt.

Sensible lending is always the way forward, and small businesses should still have to check boxes if they want to be approved, including having a proven track record of sales and profit, as well as a solid business plan.

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High street banks are frightening off small businesses

A lot of small businesses and accountants for contractors are too scared to approach their bank for a loan and instead they are hoarding money that could be put to use growing their business, according to a new report from the Bank of England.

The BoE study found that small firms are worried in case their bank cuts their overdraft facility and are sitting on reserves. Entrepreneurs worry that asking for a loan will mean their existing borrowings will be reviewed and their overdraft may be withdrawn. Experts said the results show that small companies are still suffering financial nightmares more than four years after the start of the recession.

Lending is not so much of an issue for larger organisations, but start-ups and small businesses are still finding it difficult to access credit. And the study shows that if they manage to secure a loan they face elevated fees and a long drawn out application process.

Another survey, this time from Syscap, found that 75% of SMEs think the lending margins charged on loans are too high.

Only 8% of the respondents to the Syscap survey said it was now easier for them to access a bank loan. 33% said the situation had got worse over the last year and another 12% said it had worsened in the last three months.

50% of small business owners use credit cards, personal loans or savings to fund their business, rather than approaching their bank for help. Of the firms which have asked for finance from their bank in the last 12 months, more than 33% were refused first time around.

The high street banks say they accept around 80% of applications from SMEs but this figure does not take into consideration the large amount that are put off applying.

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Where do contractor accountants find finance?

Small and medium sized businesses are increasingly turning to credit cards, and asking family and friends for loans, to keep their firm afloat.

Hilton-Baird Financial Solutions conducts an SME Trends Index survey every six months and its latest research shows that 42% of respondents admitted to using credit cards to bolster their company finances.

Bank overdrafts are still the most popular way of obtaining external finance, with 44% of SMEs using this option in the last six months, whilst 20% asked family and friends for a loan to tide them over.

Asset finance was the option of choice of 25% of the survey’s respondents, and maybe surprisingly only 21% used invoice finance.

Just over a third of all respondents said January’s VAT increase will put a further strain on their cash flow, but this jumped to 45% of those who use credit cards and loans from people close to them.

Evette Orams, the MD of Hilton-Baird, said it was amazing to discover so many SMEs using high risk means of finance in order to get a quick injection of cash. People don’t look to the long-term impact of turning to family and friends or using credit cards.

Meanwhile, it appears that the high street banks are still falling short of their Project Merlin lending targets. In the first quarter, the banks should have lent £19 billion but they fell well short of that at only £16.8 billion. Early indications show that they will have lent around £37 billion in the first half year, compared to a £38 billion target.

Lloyds Banking Group has said they will beat their agreed targets and Barclays and Santander seem to be on course to meet theirs. But HSBC and RBS are failing to meet their commitments on small business lending.

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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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Banks must treat small businesses fairly says Oakeshott

Accountants for contractors and other small business owners might be interested to hear that Lord Oakeshott has accused the banks of treating them unfairly.

The former Lib Dem Treasury spokesman pointed out that there are large discrepancies between the interest rates charged on loans to large organisations and those levied on small businesses. Figures from the Bank of England show that big firms pay an average rate of 1.78% on a £20 million loan and yet a smaller loan of £1 million would attract a rate of around 3.69%.

Lord Oakeshott would like to see the government put immediate pressure on the banks to rectify this situation and show that it is serious about helping small businesses lead the economic recovery.

One bank that it trying to do its bit is Spanish based Santander. Last week, the bank announced that it had secured £150 million from the European Investment Bank so that it can provide loans at discounted rates to firms with less than 250 employees. Funds are available immediately for companies requiring a loan of up to 12.5 million Euros over a minimum period of two years.

Santander has already pledged to increase lending to SMEs by 25% this year. The bank is increasing overall lending by £6.7 billion and £4 billion has been set aside for small and medium sized enterprises.

115,000 SMEs in Europe benefited from funding from the EIB last year and 30 billion Euros have been lent to European SMEs over the last three years, of which 2 billion Euros went to small businesses in the UK.

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Accessing finance still difficult

The Forum of Private Business has claimed that small businesses in the UK are still having difficulties accessing finance. In fact, the situation has got so bad that it’s hard for them to reach a negotiating point with the major banks.

FPB spokesman, Phil McCabe, said there is a breakdown in communication in the way lenders judge risk. In the not too distant past, decision making would be done by the local bank manager. He would normally know business customers and therefore be in an ideal position to decide where a loan was a risk worth taking.

Now that decision making has been largely centralised, the banks are less likely to know about their small customers and the local business environment. The Forum would like to see improved local decision making powers and a better local presence, he went on to say.

However, small business owners also need to up their game and produce better, more comprehensive financial information if they want the banks to say yes, he concluded.

The problem is not just in England either. The FSB has pointed out that lending in Scotland is dominated by two large banks.

The East Scotland chairman of the FSB, Michael Dixon, said there had been a huge issue over small business finance in the last three years, due mainly to the domination of RBS and the Lloyds Banking Group.

At a recent hustings event, Dixon asked party leaders what measures they would take to help firms get the finance they require to help the economy grow.

Tavish Scott, the Scottish Lib Dem leader, said his party would ensure there was a business-led, regional development bank structure across the country and although it would still be commercial lending, it would make sure finance was available.

Alex Salmond, the SNP leader was quick to criticise this proposal saying you can’t solve the problem by setting up a new bank to replace the existing ones. The answer is to make sure the banking market is competitive.

The Scottish people are voting for a new parliament this Thursday and Alex Salmond’s SNP party is currently ahead in the polls. It will be interesting to see how he makes the market competitive if he gets re-elected and will the English government follow his lead?

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Taskforce banks to be monitored by external reviewers

External reviewers have been appointed by the Business Finance Taskforce to ensure the Big 5 British banks stick to their promise of a ‘fair, prompt and transparent’ appeals process for companies that are refused loans.

The review team will be led by Professor Russel Griggs and supported by Promontory, a consultancy firm. HM Treasury and the BIS Department have backed the selections.

Companies can see details of the treatment they should receive from the Taskforce banks by checking the website or the site of their own bank.

The chief executive of the BBA, Angela Knight, explained that last October the Business Finance Taskforce agreed to 17 initiatives aimed at supporting UK SMEs. One of these was to set up a monitored process for appeals. The Taskforce banks have agreed a common set of principles for operating individual appeals and these should help businesses receive the support they need to grow.

Phil Orford, the CEO of the FPB, said business owners should not let the banks off the hook; rather they should lodge an appeal as soon as possible if they are denied funding. Otherwise the financial institutions will be able to say that SMEs are satisfied with lending decisions.

Meanwhile, Barclays Bank credit card division has recently acquired the credit card portfolio of MBNA Europe in a move which will expose the high street bank to around £130 million of outstanding debts.

Bob Diamond, the new chief executive of Barclays, has decided that the bank should increase its appetite for risk if it is to meet its profitability targets for the next three years.

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Mixed news for SME lending

Aldermore, the specialist asset finance company, increased its lending to SMEs by 206% in the last year. At the end of last year, the firm had £410.2 million of outstanding loans to small and medium sized enterprises.

Aldermore’s CEO, Philip Monks, said this outstanding performance showed the strong progress the bank has made towards obtaining a significant market position. He went on to say that he was extremely proud that his team had got the right formula for customers, staff and shareholders.

Originally firms came to Aldermore because they couldn’t raise capital from their banks but now they know there is a better alternative to the indifferent service level they obtain from the large banks.

SMEs have been complaining for many years that the business banking market is not conducive to small firms and if Aldermore has been able to expand their business so quickly, it would suggest that the complaint was justified.

Aldermore launched after the credit crunch and specifically focuses on lending to SMEs and homeowners.
Small businesses may well feel that it’s just as well that Aldermore have entered the lending marketplace.

On the other hand, Barclays has now announced that it will no longer provide asset finance to companies with less than £5 million turnover per year. The bank made the announcement within a week of the Project Merlin agreement that was meant to secure additional funding for SMEs.

As part of the Project Merlin deal, the big banks agreed to make an extra £190 billion available to companies this year, £76 billion of which should be for SMEs.

Barclays decision means that it will no longer lend to small businesses and limited company contractors, and if they want to buy computers, machinery and vehicles it will hamper those companies’ ability to create jobs.

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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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Businesses asked how finance options could be increased

As SMEs struggle to access funding from the banks, the Treasury has launched a paper asking businesses to give their views on how to increase finance options. These will then be proposed later this year.

At the launch, Financial Services Secretary to the Treasury, Paul Myners said the economic woes of the last two years have highlighted the need for a more holistic approach to business finance, and that one single source of credit is not enough. With a widespread contraction in bank lending, firms that had previously relied on debt finance found themselves in a precarious situation.

In the UK, some of the larger companies have been able to access money direct from the credit markets, through the issue of corporate bonds. Small businesses, including many contractor accountants however have had their lending options squeezed dramatically, even though the likes of Lloyds TSB and RBS were given specific lending targets by the government.

British Chambers of Commerce economist, Steve Hughes, says that many businesses have struggled over the last 18 months to obtain finance through the banks.

‘The current fragility has brought to prominence alternative methods of accessing finance. It is up to the government to make sure funds that are available can be readily accessed by the business community,’ he adds.

According to research from network group Business Junction released in December last year half of overdraft applications are still rejected by the banks and businesses report that lending attitudes remained unaltered since August 2008.

In the same research, SMEs in London say small business support schemes have been ineffectual with only 22% of businesses saying they have been able to take advantage of the government schemes.

The lack of available funding from business bank accounts may be one reason why one in ten entrepreneurs plans to quit the UK.

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