The right kind of magic
Project Merlin may prove unable to cast the right spell over banks, with small businesses in particular still begging for credit, says Phil McCabe
The government’s Project Merlin agreement was supposed to work its magic by encouraging banks to provide more affordable credit to businesses across the UK, but many entrepreneurs say they are still waiting for a miracle.
In February, the UK’s Big Five banks agreed to lend £190bn to businesses throughout 2011. Some £76bn of that was reportedly earmarked for small firms. But by May the banks had lent £2bn less than was agreed. Second-quarter figures this year were an improvement, but questions remain about whether or not the businesses most in need are benefiting. Furthermore, that funding may be costly.
A small business finance survey from the government suggests that demand for finance increased from 23 to 26 per cent from 2009 to 2010. Yet it also found that 51 per cent of small business respondents had encountered extreme difficulties in obtaining credit.
However, many agree that demand for small business bank lending is, in fact, falling. We at the Forum of Private Business argue that this is a result of increasingly punitive risk criteria in use by lenders, and subsequently steep interest rates imposed by the banks. It is not indicative in any way of a lack of need for affordable finance.
Small business owners may be seeking out alternative sources of credit. This could potentially mean loans from friends and family, or even using personal credit cards. However, these are not sustainable long-term funding routes.
A few reasonable moves would make a big difference to cash-strapped firms: better competition, more investment in regional branches and the restoration of lending powers to local bank managers.
Just as helpful, we believe, would be enterprise policies that allow alternative lending platforms to compete with big banks in the finance markets.
The government must also do more to tackle the widespread problem of late payments, which drains firms of liquidity. We believe SMBs in the UK are owed a total of £24bn at any one time, mainly by large companies. This works out at £12,000 per firm on average.
The government has pledged to implement the new European Directive on late payments a year early. The directive will enforce standard 30-day payment terms, but there is a risk the ruling will simply be ignored. We believe that, despite potential fines for non-compliance, it may not be effectively policed.
The UK’s public sector already has a five-day payment target, but there are concerns that some government departments may move away from this ambitious and admirable target.
A prompt payment code was implemented by the last Labour government. Meanwhile, there is also a proposed groceries adjudicator bill. But there have been no clearer moves to enshrine prompt payment terms in law. If businesses are struggling to secure payment on time and in full, it is all the more important for them to be able to access affordable credit.
Meanwhile, businesses should work on improving their financial management to provide lenders with accurate, up-to-date and standardised financial information.
There are indications from the Better Business Finance initiative that more businesses may be taking advantage of the new lending appeals process when they believe they have been unfairly rejected for finance. Some of them, we believe, have succeeded. However, we also believe more action is needed within the banking sector to get cost-effective credit to the businesses that need it most.
Credit easing
The credit easing scheme announced by the chancellor at the Conservative Party conference had yet to be properly defined at the time of writing. However, as it is likely to require the creation of small business bond markets almost from scratch, we think it is a medium-term strategy at best. At worst, it is reminiscent of the sort of mixed-risk debt trading that sparked the credit crunch in the first place.
It should certainly not be seen as a magic wand. As well as trying to pull rabbits out of hats, the government should be pursuing common sense enterprise policies and seeking to improve small business banking services if it expects transformation in small business lending any time soon.
Phil McCabe is media and PR manager at FPB