Small Talk: The banks are still not following their own guidelines for lending – starving creditworthy businesses of cash


Click to follow
The Independent Online

Banks are still making thousands of poor decisions about whether to lend money to small businesses, according to the banking industry’s own adjudicator.

Russel Griggs has been in post for four years, offering small businesses with an annual turnover of less than £25m an independent service to which they can appeal if their bank turns them down for credit. His latest quarterly report, published today, suggests he may need to remain in the job for many years to come.

Professor Griggs had 965 appeals from small businesses with rejected credit applications during the first quarter of the 2014-15 financial year and he upheld 254. In other words, in more than one in four of the cases where small businesses had applications turned down, their banks made the wrong decision on the basis of the criteria agreed by the sector and Professor Griggs.

These are not cases where one person’s subjective judgement about the creditworthiness of a small business differed from someone else’s, but examples of where the banks in question did not correctly follow the lending criteria to which they are supposedly wedded.

In the context of the whole small business sector and the £100bn plus of total borrowing it holds, the £5m of extra funding Professor Griggs secured for the businesses whose appeals he upheld is tiny. But it is the high failure rate that should be of concern. It seems incredible that after all these years of allegations the banks aren’t treating small businesses fairly, lenders are still making the wrong decision on a quarter of rejected loan applications, but that’s what the figures tell us is going on.

Professor Griggs’ reports cut through the stultifying debate into why the total amount of lending to small businesses remains stubbornly low, despite the efforts of the Treasury and the Bank of England.

Small business groups say the banks have been deliberately keeping the purse strings pulled tight and that good, creditworthy companies’ prospects of growth are being held back. The banks say the low figures represent a lack of appetite for borrowing from businesses that remain cautious following the financial crisis and the recession.

Professor Griggs’ data does not try to arbitrate in this argument. But what his figures tell us is that many small businesses that do have the confidence to look for funding are being unfairly turned down.

That’s a problem that has to be fixed. Not least because, if you buy the banks’ argument, there must logically come a time when more small businesses will find the courage to seek credit, particularly if the recovery continues. If we are unfairly rejecting credit applications from a large chunk of the small number of businesses currently seeking to borrow, there is clearly a potential for a large problem in the event that many more begin applying for finance.

Professor Griggs takes some heart from the willingness of the banks to work with him – he suggests that armed with a better understanding of the cases where appeals are being upheld, the banks may be able to fine-tune their processes in order to ensure they don’t keep making the same mistakes.

It’s an optimistic thought, but it must be said that the banks have had plenty of time to get this right – and while the appeals success rate under Professor Griggs’ service does appear to be falling, which is encouraging, it is not falling fast enough.

We may need further regulatory intervention to ensure small businesses get the service they are entitled to from their banks. After all, a lending institution that isn’t capable of following its own rules and procedures in one in four of the applications for credit it receives is surely in need of closer scrutiny.

Tax credits boost investment

More generous tax credits for small businesses engaged in research and development have prompted significant additional investment, data suggests. The amount spent on R&D by small and medium-sized enterprises rose 42 per cent to £595m last year, according to the accountancy firm UHY Hacker Young.

Its data will encourage the Government, which in 2012 dropped a requirement that meant small businesses could only claim tax credits for R&D investment on spending of £10,000 or more – the current rules mean that any R&D spending now qualifies for tax credits.

Matthew Hodgson, an R&D specialist at UHY Hacker Young, said that the increase in investment among smaller businesses proved that more favourable tax treatment was an effective way to incentivise investment.

British firms are active exporters

Britain’s smaller businesses, often attacked for their failure to embrace export markets more enthusiastically, are actually having more success with overseas sales than any of their continental European counterparts, a new study claims. A survey of 8,000 small and medium-sized businesses across the European Union, conducted by the logistics firm UPS, found that UK businesses had been 29 per cent more successful than the European average at increasing turnover from exports outside the EU and 26 per cent more successful with exports inside the EU.

UPS’s research also suggests that small businesses of all sizes in the UK – including micro firms with only a handful of employees – are increasingly active exporters. It said businesses with between 50 and 250 employees were the most likely smaller companies to be making overseas sales, with almost one in three now doing so.

Small Business Person of the Week: Nick Emmel, Co-founder, Mr President

“I founded Mr President with my two co-directors in 2012. We had all been working in the digital sector since its earliest days, helping companies and other organisations to make the shift away from traditional advertising campaigns to talking to their customers in new ways, and we’d reached the point at where we were talking to each other about what we might do next.

“We were introduced to Bacardi by Heidi Cohu who had previously helped Red Bull do all those interesting non-traditional forms of marketing and was working with the Bacardi group to do something similar. We set up an agency initially to serve Bacardi, but other clients soon came on board.

“We were at a point in our careers where it was possible to make that shift more easily – it was the softest possible ejection really. We’ve picked up business from all sorts of people, from Nike to Greenpeace, but it’s all come from people we’ve worked with in the past. We’ve been profitable from day one and we’ve never had to chase new accounts or take on work we weren’t particularly interested in. We’re more or less a £5m turnover business now and we have 40 members of staff.

“It is scary because most of the projects we do are new – there is no accepted process as there is with, say, making a television advert. For Bacardi, for example, we’re just about to fly three music stars to the Bermuda Triangle and stage a three-day festival on Montserrat.