David Prosser: 'The offer of unaffordable credit is as useless as the offer of no credit at all'
Tuesday 10 November 2009
Who to believe? Royal Bank of Scotland (RBS) said on Friday that businesses were paying back loans as fast as the bank could make them – and that British companies have unused overdrafts with it worth a total of £27bn. Like the rest of the banks, RBS insists it is not restricting the supply of credit to business customers.
So how come every little bit of anecdotal evidence and most economic research suggest that businesses – particularly small and medium-sized enterprises (SMEs) – are still struggling to borrow the money they need? The most recent survey from the Confederation of British Industry (CBI) revealed that a sizeable minority of businesses had found credit harder, rather than easier, to come by over the previous three months.
Lord Sugar, the tycoon-cum-TV star appointed earlier this year to the Government to represent the interests of growing businesses, reckons he knows how to square the circle. "I can honestly say a lot of problems you hear from people who are moaning are from companies I wouldn't lend a penny to," he told SME managers in Manchester last week. "They are bust and they don't need the bank – they need an insolvency practitioner."
The Federation of Small Businesses, suffice to say, begged to differ, and was scathing about Lord Sugar's comments.
But there may be a kernel of truth in what The Apprentice star has to say. In a recession, of course, banks are going to be more cautious about which businesses they lend money to. Given the kind of bad debt provisions that banks are currently making, it's hardly surprising that they're reluctant to advance money to any business about whose trading prospects they have concerns.
Still, the problem must be more deep-seated than that. RBS presumably isn't lying when it says that its overdraft facilities are not being used – or that many companies are paying back loans rather than asking for new credit.
RBS and its rivals have not told us what sort of terms they are making credit available on. The CBI's data suggests those businesses that do get a yes from the bank when applying for credit are being asked to pay much more than in the past for the advances.
What seems to be happening is that banks are routinely raising the charges and interest rates paid by businesses. That's not surprising – they are desperate to return to profitability – but it does explain why overdraft facilities are not being used. The offer of unaffordable credit is as useless as the offer of no credit at all.
It is also worth saying that SMEs don't all depend on credit to get by and grow. The Independent's own research reveals that many of these businesses have balance sheets that would make their stock market-listed rivals green with envy. Staying away from the stock market has actually been a positive in this sense. Many listed companies are loaded with debt because shareholders put pressure on them to gear up.
Still, businesses do need credit from time to time. And it is clear that many SMEs are finding it difficult to borrow.
Where else then might SMEs find credit? One idea being kicked around the corridors of the London Stock Exchange (LSE) points out that many other countries have thriving markets for bonds issued by SMEs, with private investors snapping up the debt issued by these enterprises. In the UK, by contrast, only large companies, with ratings from the agencies, are able to issue corporate bonds, which are almost entirely the preserve of institutional investors.
The LSE is thus keen to launch an exchange on which smaller businesses' bonds might be traded, giving SMEs a crucial new market on which to raise credit. Their reliance on the banks might then be diminished.
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