The UK banking system is currently failing small businesses.
In theory we do have a solution, the British Business Bank (BBB), but it’s not fit for purpose and isn’t even a real bank – just a platform for connecting lenders to SMEs. As we look to reboot the UK economy, the government needs to take radical action to ensure small businesses aren’t denied funding by a banking system which doesn’t work for them.
At present SMEs looking for funding face a perfect storm. Blanket credit policies from the banks, the fact that some SMEs are overleveraged due to the CBILS borrowing they needed to survive the pandemic, issues with liquidity within many alternative peer-to-peer lenders, and the banks’ current lack of lending appetite, have all combined to make present circumstances very tough for SMEs. They need help urgently and the best solution would be to establish a new government-backed bank to rival the main high street and investment banks and to replace the British Business Bank.
The British Business Bank doesn’t perform a banking role but simply helps introduce other commercial lenders to SMEs to help them obtain finance. Unfortunately, it fails in this task. Its website simply points potential borrowers to the sources of lending that may be appropriate, but most of these are commercial moneylenders with their own terms and conditions. It takes a huge amount of time to work through these in applying for finance and any small business owner could find pretty much the same information by a simple web search.
‘Small businesses in the UK are being let down’
Small businesses in the UK are being let down because it’s still very difficult and time consuming to raise even small sums of money at a fair rate of interest.
The BBB also plays an intermediary role administering the Coronavirus Business Interruption Loan Scheme (CBILS) and performs poorly here too. Several UK banks and lenders have identified the BBB as the intermediary that has been obstructing fast access to COVID-19 emergency cash, citing the BBB’s lack of resources and complicated processes as the main problems.
Under the terms of the CBILS loan scheme, banks make their own decisions about which customers to lend to, but the Treasury requires them to book those loans with the BBB. Banks across the country must follow BBB rules in order to qualify for the Treasury’s 80 per cent guarantee of the money lent under the scheme, but banks and other lenders say that the BBB is following Treasury guidelines far more rigidly than support schemes in other countries.
Meanwhile traditional high street banks and other big financial institutions are not covering themselves in glory either. They are often not prepared to take the trouble to understand the characteristics of particular firms and don’t empower their staff to make judgement calls, instead relying on sweeping judgements about whole sectors.
Many SMEs with long-term potential will therefore find themselves locked out of funding.
We’ve seen many examples during the lockdown period of good businesses that can’t access the funding they need from high street banks. One example is a coach company that has been frozen out of accessing vital funds to keep the business running during the pandemic because its industry sector code (SIC Code) is “Travel & Tourism” and it has a high level of hire purchase. This is a business with a long history, strong financials and growth, and no more debt than you would expect to see any similar business possess: in short, it’s a good business. Yet it can’t get the funds it needs because the banks deem the whole sector “high risk” and are not looking for the good businesses that need support within that sector.
What we need is a bank prepared to back deserving companies over the long term that is free from ordinary shareholders with vested interests. The government could invest in the bank directly, or, if funds are to be raised from private investors, they should be in the form of bonds or other instruments that insulate the bank from short-term pressures. Staff should also have expertise in specific business sectors, so they have the confidence to make a judgment call about a company’s prospects for long-term success, rather than relying on crude metrics (like credit ratings) or generalisations about certain sectors. We need a “central” UK bank that will actually provide funding directly to a growing company at a fair and reasonable rate, rather than through associates.
There is already a precedent, as until 1990 the UK had a viable postwar model in 3i, Europe’s most successful venture capital firm, and its precursor, the Industrial and Commercial Finance Corporation (ICFC). ICFC was set up in 1945 and backed companies with sound business fundamentals regardless of short-run fluctuations both politically and in the markets. It had a public purpose and it was decentralised because it delegated authority to local branches, where staff were expected to develop a real understanding of their client businesses. Its commercial success came from growing alongside its borrowers, rather than profiting from them. It proved to be a successful model that paid off for the ICFC as well as its clients.
Ball and chain
The UK government should act now and establish a new institution similar to the old ICFC before lack of funding becomes a ball and chain around SMEs. Indeed, if it misses this opportunity, we may never get another. We have a credible prospect of a reset that enables both a successful recovery from the pandemic and the levelling up that is fundamental to the future of the country. The financing model of the past three decades has not worked for the SMEs, especially in the regions, and there is no basis for expecting it to do so in the more hostile environment after COVID-19.
The UK needs to think urgently about reviving the ICFC model, or COVID-19 and the lockdown will do a great deal of damage to our SME sector which could be avoided. What small businesses really need is a proper British Business Bank.
Greg Taylor is a partner at MHA Macintyre Hudson and head of MHA Financial Solutions