Capital for Enterprise chief executive Rory Earley explains the reality of whether small businesses can have bank loans approved in the current economic climate.
I’m sure that like me, you have seen headlines about banks not lending to small businesses with depressing regularity. These are often followed by dire warnings about growth being held back and, worse, companies failing for lack of finance.
The old story that banks will lend you an umbrella when the sun is shining, but take it back as soon as a cloud appears comes out more and more often.
But have you wondered why there are so many claims that the banks have shut up shop? Surely they can only make money by lending money. It simply makes no sense at all for them to stop lending completely.
The evidence is that they are still lending – at around £500 million each month in new term loans to businesses turning over less than £1 million. In total, the banks have about £37 billion of term loans outstanding to small businesses and around £7 billion of overdraft lending.
Of course figures can hide more than they tell you. Some numbers seem to say that, on average, small businesses are borrowing less and saving more, which could support the banks’ argument: that they cannot lend because small businesses do not want to borrow. But the answer must be more complicated than that or small firms would not be complaining.
To me, it seems that there are businesses that:
- Have enough cash to save some away and don’t need to borrow.
- Want to borrow and do get loans from the banks.
- Could borrow to invest, but choose not to just now.
- Might borrow but think they will be turned down.
- Want to borrow and don’t get a loan from their bank.
It’s the last group that potentially causes the most concern. The most pressing cases are always when a business is on the brink. It may need to pay wages or a key supplier but a customer has not paid or, worse, has gone bust or gone elsewhere. So, even if the business is profitable, the cash isn’t there to pay the bills. The obvious first call is to the bank – can I have or extend an overdraft?
Well, while the bank will want to lend, it won’t want to lose money, so it needs to be satisfied that the business can repay the loan or pay down an overdraft.
It needs to be sure that there will be enough cash not only to repay, but also to provide a buffer in case other customers go down or disappear. And with the current state of the economy, the banks have probably been looking for bigger buffers.
Even if you show you can repay, the bank will often need some more comfort. It still needs to get its money back if the repayments aren’t made, so it asks for security as well.
That can make it very difficult to borrow. Even if you are profitable, think you can afford to repay, and have some assets, the bank might still say NO! Why? Well remember that the money being lent is often the savings of other people and other businesses: so it can’t afford to take risks with that.
But are the banks being too risk averse? The truth is that nobody knows the answer to that question because nobody can know with any certainty how quickly the economy will be back to sustainable growth and how rapid that growth will be. Only when confidence returns will banks feel able to relax their lending criteria. In other words, when the sun comes out!
So what can be done? If the banks don’t meet the targets government has set, growth will be slower and less certain, creating a vicious circle.
But it’s not just about targets; there is practical help for lending as well. Where a bank would lend but can’t because of a lack of security, it can call on the Government’s Enterprise Finance Guarantee (EFG). The scheme can substitute for a lack of, or even absence of security, and it can be used for new borrowing, restructuring existing borrowing, overdraft extensions or invoice finance facilities. It helps the bank to say Yes where otherwise it would say No.
There is plenty of capacity available for banks to use it and as much support as they need to help them do so. There is no reason for them not to. They’ve already used it to help over 15,000 businesses borrow more than £1.5 billion.
Not only does the EFG help businesses who would otherwise be turned down, it can also encourage those that think they may be turned down to make an approach to their bank. That can encourage investment and help to get the wheels turning again. Just what we need.
One final interesting statistic which questions the mood of gloom. Tucked away in the latest insolvency statistics is the news that the liquidation rate of companies in the year to end-June was 0.7 per cent.
That’s the proportion of active companies that went into liquidation in the year. That figure is much lower than the peak of 2.7 per cent in 1993 and lower than the 25 year average of 1.3 per cent. So perhaps things aren’t so bad in the real economy?
Capital for Enterprise is a fund management company which designs, delivers and manages venture capital and debt guarantee schemes on behalf of the public and private sectors.