Banks and small firms call a truce

News Analysis: In the last recession the banks were accused of failing to back small businesses they had lent to. Will they do better this time?
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The Independent Online
ANTIQUES DEALER Peter Curbishley has plenty of experience of the sort of problems all too familiar to small businesses. As he says: "You always have a problem with cash flow." At the end of last year, "things went slightly pear-shaped because I was owed lots of money".

The next stage was something many owner-managers will recognise, too. His bank responded by stopping his cheques. Mr Curbishley, who has run his Crewe-based business for 35 years, felt he was "going nowhere very rapidly".

But then the Forum of Private Business, for years a stern critic of banks' attitudes towards its 23,000 members, stepped in. Within a short period Mr Curbishley had been granted an apology and now has a relationship with his bank's business manager that he says he cannot fault.

It is the sort of episode that is being trumpeted by banks and commentators as evidence that if the UK is heading for recession, the results will be less devastating than last time. Business advisers stress that it is too early to tell whether there has been a genuine change in banks' attitudes towards their small business customers since the early 1990s, but there are growing indications of a better understanding between the two sides.

For example, the FPB's latest biennial report on relations between small firms and their banks shows that banks have improved in the eyes of these businesses for the third successive time.

Eddie George, Governor of the Bank of England, said the report, written by Nottingham University academics and published in September, gave encouraging signs that the business/bank relationship could withstand an economic downturn. Banks had made significant changes to the way in which they serve the small business market, while the financial understanding of these businesses had also improved.

This latter point is particularly significant because, although it was the banks that were heavily criticised during the early 1990s recession, it was clear that many small business owners were ill equipped for the task. One manager with NatWest, the largest lender to the sector, remarked during a training programme at Durham University Business School, established by the bank in the wake of that criticism, that he was impressed when a proprietor showed him graphs of his firm's sales and costs. It was not unusual, he said, for small businesses to keep only the most basic of records, often in a child's exercise book.

Significantly, the Government is putting as much effort into tackling financial management in small firms as into encouraging banks to change their approach to the sector. Geoffrey Robinson, the Paymaster General, earlier this week responded to a report of the financial management working group by appointing Andrew Godfrey, head of growth and development at accountants Grant Thornton, to lead a more focused group dedicated to developing "simple low-cost financial health checks" and to encouraging the Business Links unit to play a part in making firms aware of them.

Mr Godfrey said at the launch of the report: "As accountants, we may overestimate the importance of training, but small and medium-sized enterprises (SMEs) underestimate its value and the long-term benefit it can have for the business."

The banks say that such assistance is already available. NatWest, for example, says it has been sending customers regular information designed to improve their financial management. With the worsening economic outlook, it has been urging firms to prepare for a downturn by carrying out such exercises as seeing how they could handle a 10 per cent drop in profits or the loss of their biggest customer.

David Kern, NatWest's chief economist, believes the results of such schemes are already evident. In a speech to the Institute of Business Advisers in Coventry at the weekend he said: "UK small businesses are better managed, more focused and more enterprising than 10 years ago."

NatWest and the other banks are keen to stress that they have learned from the last recession. Ivan Armstrong, head of corporate support and recovery at Barclays, said: "It's in everyone's interest for a business to survive rather than fail."

As a result, banks are more keen to encourage their managers to develop working relationships with their customers so that, in one banker's words, instead of "lending willy-nilly" and then stopping funds when things look bad, they have a better awareness of events and needs. There has been significant progress in moving small firms away from overdrafts towards more predictable loans and other forms of finance.

However, Simon Rees, a partner with Rees Pollock, a firm of accountants specialising in growing businesses, warns that it is too soon to tell whether banks have really changed their approach. He and his colleagues have seen a "noticeable cooling in the desire to lend", but have not yet seen any firms get into serious trouble and risk having their funding stopped.

"My instinct is that they will be better than before because the memory of last time is still so fresh," he says. He agrees with the view that business is in better shape now than in the run-up to the early 1990s recession. That experience had "scarred a lot of people and made people a lot more cautious".

He also believes that small businesses are not giving the Government credit for creating a more enterprising environment, in spite of all the initiatives supposedly being planned by the Treasury and Department of Trade and Industry. "My clients do not feel they are being particularly encouraged."

In the meantime, while the coming into effect on 1 November of the Late Payment of Commercial Debts Act provides at least a theoretical boost for small firms' cash flow, these businesses could be hit by a raft of new costs - including the minimum wage and higher National Insurance contributions - just as their ability to meet them is diminished.