Small talk: As more small companies appeal against rejected applications for credit, banks need to try harder to get their lending decisions right
More than 1,100 small firms were wrongly turned down for finance by a big bank over the year to the end of March, a report reveals today.
The data comes from Russel Griggs, who since 2011 has been running a government-backed independent appeals system for small businesses who think their applications have been unfairly rejected – or approved with unfair conditions attached. Today, Professor Griggs’ annual report will reveal that his organisation dealt with 3,518 appeals last year – a 6 per cent increase on 2012-13 – and that he upheld almost 32 per cent of them.
There are several possible explanations for the rise. One is that more small firms are applying for finance as their confidence improves. Another is that more businesses have become aware of the appeals service. Or it could be that the banks’ lending practices are once again deteriorating.
The latter would be worrying, and it is notable that the success rate on appeals remains remarkably high. One in three companies turned down for credit get the decision overturned.
It seems reasonable to assume, moreover, that many businesses turned down for credit unfairly never get round to appealing – because they don’t know about the service, perhaps, or they have low expectations about their chances of success.
The bottom line is that three years after the Government recognised that some banks’ lending practices were so poor that intervention was required, serious problems appear to remain.
Professor Griggs’ report does note improvements across the banking sector – every organisation that is a member of the appeals scheme has changed at least some of its practices as a result of their participation.
Nevertheless, it is disappointing that so many companies are obviously still getting a raw deal from lenders, and Professor Griggs suggests there is still much work for banks to do. Their over-reliance on credit scoring, particularly for smaller loan sizes, appears to be one issue to address as a matter of priority. Another issue is that small firms don’t always get clear guidance on why their application for finance has been turned down or how they might be able to improve their chances of success in the future.
Two arguments, in particular, should focus the minds of lenders. The first is that as the economic recovery in the UK takes hold, small businesses will need funding in order to invest for the future. Those banks that fail to service that demand properly will risk losing customers – and they’ll also be putting the brakes on economic recovery.
The second issue is that banks no longer have the lending market to themselves, with competition coming from a variety of alternative lenders.
With the economy improving, it’s good news that the banks appear to be working hard to improve their funding decisions. But it is obvious that they are still getting too many decisions wrong.
Auto-enrolment: now for the hard part
Auto-enrolment continues to be a headache for thousands of employers, with small and medium-sized companies all due to adopt the Government’s flagship pension scheme within the next three years.
While the first stage of auto-enrolment, covering large companies, proceeded smoothly, the next phase looks set to be more fraught as all small businesses are required to offer their staff pension provision, and to enrol them automatically.
Research by Sage, the business software specialist, shows that one in five small firms have not even begun to prepare for auto-enrolment. And 47 per cent say they are concerned about the cost both of implementing a scheme and paying into it on a continuing basis. Many firms complain that the big pension providers are not offering the same charging structures to smaller companies as their larger rivals were able to obtain.
“With such a large number of firms currently not offering a workplace pension, and a fifth not preparing at all, auto-enrolment has the potential to provide a nasty, unwanted and completely avoidable shock for small businesses across the country,” said Lee Perkins, managing director of the start-up and small business division at Sage. “I urge businesses to make sure they are in the know, that their employees are informed and that their business is compliant as soon as possible.”
Shops can’t carry on at their convenience
While the UK’s emergence from recession is clearly good news, there are fears that we may see a sudden spike in small business failures during the recovery period; that has been the experience in previous recoveries.
One problem has been that lenders have tended to be less understanding during improving economic times than in the depths of a downturn.
Almost 1,300 retailers went under in England, Scotland and Wales over the year to the end of March, according to the accountancy firm Wilkins Kennedy – a 12 per cent increase on the previous year.
“Retail insolvencies have occurred across the sector, with bricks-and-mortar retailers being squeezed by ecommerce players, but there have been particular issues among small, independent convenience stores,” said Anthony Cork, a partner at the firm.
“These are being squeezed out of business by the expansion of the big supermarkets and their continued push into the convenience- store format.”
Business person of the year: Andy Oldham MD, Quidco
A self-funded business where growth leads to better services
“Quidco was founded in 2004 and we’re the UK’s number one cashback rewards platform – we have more than 4 million members and we work with 4,000 retailers.
“The business grew out of an online newsletter about good deals. Our founder came across affiliate marketing – the fact that retailers will pay commissions to platforms who refer customers to them. We are able to refund that commission to the customer, which is where the cashback comes from.
“Over the past few years, we’ve tried to expand on that core business. We now enable people to register their debit and credit cards with us, which means they are able to claim cashback on in-store purchases too. We’ve helped to incubate a related small business operating in the grocery industry and we’ve launched a price comparison service. We’ve also begun exporting, by taking Quidco to Germany.
“Our increased size has enabled us to improve the service. For example, we can fund cashback payments from working capital so that customers don’t have to wait for the retailer to process our commissions.
“The data we hold on how customers spend their money means we can provide retailers with valuable insights and also work with customers to deliver personalised offers.
“We’re a self-funded business and we have reinvested much of our profit back into the business.”
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