The banks want to lend: they just can’t find the businesses

Andrew Leck
SENIOR politicians have repeatedly called on the banking sector to increase their lending to SMEs (small and medium-sized enterprises). According to new ACCA/CBI research, however, they’ve got it the wrong way around: the banks are willing to lend but there are increasingly fewer and less credit-worthy businesses to lend to.

Discouraged demand is very much a part of the problem. Banks have a long way to go before they can regain their smaller clients’ trust. Meanwhile, the perception, reinforced by the media and politicians, is that the banks won’t lend. Thanks to that, many growing SMEs aren’t even bothering to approach them.

Although micro-businesses are less likely to get bank finance than their larger counterparts, SMEs applying for additional finance are more likely to receive at least some of the funds they are after than not; in fact, approval rates haven’t been as high as they are now since the beginning of the credit crunch in 2007. When banks protest that they are lending, they are telling the truth.

As SMEs continue to turn their backs on the banks, especially cash poor SMEs that are traditionally more likely to apply for bank finance, they are having to rely more on their suppliers for short-term finance. The state of trade credit has been completely obscured by the unrelenting focus on bank lending. Yet as a financial market for small businesses, trade credit is easily as important as bank lending. Trade credit flows are twice the size of bank lending and SMEs’ accounts payable are equal to 19 per cent of assets – a figure in the hundreds of billions.

With trade credit becoming increasingly important, small business managers are finding themselves running small banks; something they never signed up for and in which they have little expertise. Late payment may have receded somewhat in 2009, but at £24bn, overdue payments to UK SMEs could have comfortably paid off Ireland's entire budget deficit for that year.

The research confirmed that small business information on credit risk is overwhelmingly relationship-based: credit checks or accounts filed with companies house are rarely used beyond the initial investigation of the newest of customers; small businesses are happy to use information on customers that is twice as old (ranging from 21 to 37 weeks) as information that they’d use for their own management purposes.

Our findings come full circle, because poor credit management leads to poor cash flow, which makes a business’s chances of obtaining funds very slim.

Inevitably, the government is relying on the private sector to grow into its spending cuts and drive the economy, but none of this is going to happen unless SMEs – which account for 51 per cent of private sector output – have secure access to finance and the confidence to use it.

Both banks and government need to address the perception that banks aren’t lending. But they also need to help SMEs prepare and become more bankable. Education for business owners on the type of information that banks need to approve loans would help, as would in-depth feedback on rejected applications; one way for banks to meet SMEs half way. And of course banks must take a hard look at why micro-enterprises have much more trouble accessing new finance.

On the trade credit side of things, information is again the key. Finance staff, financial advisers, and government need to educate small business managers about credit management. Tools that are currently under-used, such as credit reference information, could become considerably more useful if small business access to them was improved.

SMEs need much more finance to help drive the recovery. After two years of throwing money at the problem and calling each other names, it is about time for the government and the banks to take a more constructive approach to lending.

Andrew Leck is the head of the Association of Chartered Certified Accountants (ACCA).