Could a business bank work?

Smaller businesses are still struggling to source finance despite numerous initiatives. Phil McCabe examines the merits of the latest plan

Discussions about plans for a government-backed “business bank” to boost small business lending should accompany continued efforts to shake up commercial lenders’ service levels. Otherwise, finance will continue to be scarce and costly.

Vince Cable, secretary for business, suggests such an entity could work with commercial banks such as the Co-op and Germany-based Handelsbanken. But what would the structure be and how would it work?

What if it were simply an amalgamation of the numerous government financial support schemes aimed at small businesses, including the much-criticised Enterprise Finance Guarantee (EFG) scheme to underwrite bank loans to smaller firms?

Without the UK’s biggest lenders changing direction in parallel, this will be unlikely to solve the crisis in small business funding. Government finance initiatives so far do not appear to be working. Few smaller businesses are managing to borrow.

Any new “business bank’” must offer real hope, in the form of affordable credit, and encourage private banks to follow suit.

Further, declining lending has, to some degree, overshadowed another major issue affecting the banking system: the closure of local branches. Branch closures over the past 12 or so years have coincided with increasingly over-centralised decision making and the removal of lending powers from local bank managers.

I have read that even beyond rural areas, some 466 urban communities now have just a single branch to serve them. While many are within a mile of another bank, this is still inconvenient for members of the public as well as businesses. Especially when smaller retailers, for example, are struggling as a result of falling sales - which may or may not be affected further by declining footfall in their area.

This is a truly worrying situation. Few mainstream banks appear to really understand the relative merits of the smaller businesses seeking funding when assessing their lending applications.

We accept that many business owners need to up their game by producing and presenting financial targets and business plans more effectively - but banks themselves still have a major part to play and must re-invest in their local branches and small business services.

There is some good news. There is a viable route available for small businesses that believe their banks have treated them unfairly. The British Bankers’ Association’s new appeals process has reportedly overturned 39.5 per cent of rejected funding applications in its first year of operation. That information is contained in a recent report from Professor Russel Griggs, the lead reviewer of this appeals process.

If the Griggs report is accurate, some 2,177 small businesses initially denied finance may now have received it.

However, this is clearly just the tip of the iceberg. So we are urging more disgruntled business owners to use the appeals process without delay. Their future - and that of the UK’s economy - could depend on it.

Phil McCabe is senior policy adviser at the Forum of Private Business (FPB)