Banks let 120 small businesses go under every day
The government claims its Enterprise Finance Guarantee scheme is working but small firms insist the banks are still applying it unfairly
When Frank Stevens asked Barclays bank for a £500,000 loan to help pay for a new showroom at his boat business in Weymouth, the bank said yes — on condition that he first deposited the same amount, £500,000, at the bank.
Stevens — whose firm, Blue Water Horizons, is just yards from where the 2012 Olympics sailing events will take place and so hopes to benefit from the surge in visitors — was astounded by the bank’s response. He said: “I couldn’t believe it when they told me. If I had the money in the first place I wouldn’t need to go to the bank to borrow it.”
His experience is by no means unique. Happily for Stevens, the money he needed was to expand his already thriving business. For many other small firms, though, the money they seek will spell the difference between survival and disaster.
When the government unveiled its Enterprise Finance Guarantee (EFG) scheme a few months ago to help small firms that were facing temporary cash-flow problems, there were loud cheers from Britain’s small-business community.
With delayed payments from customers who owed money adding to the problems they were already experiencing in the face of declining sales, the promise of an instant injection of cash to tide them over a difficult patch was extremely appealing. With the government pledging to back £1.3 billion in loans and overdrafts with a 75% guarantee so as to encourage banks to lend, they thought they could at last begin to sleep more easily.
Sadly it hasn’t quite turned out that way. Britain’s high-street banks are still refusing to lend to small businesses and the consequences are proving catastrophic. About 120 small firms are going bust every day and thousands more are teetering on the brink of bankruptcy.
As a result 36,000 small firms are expected to close down this year, according to BDO Stoy Hayward, the business adviser, causing the loss of 150,000 jobs. And a large part of the blame, claim small firms, lies squarely with the banks, which are putting up every kind of obstacle to prevent small firms getting the financial help that they need.
Over the past few weeks The Sunday Times has received dozens of e-mails from small-business owners who have been refused a loan under the EFG scheme or who are struggling with the hurdles involved in accessing it. And this is just the tip of the iceberg.
Steve Hay at the accountancy firm 2020 said: “Every one of my clients who has applied for EFG has been knocked back. I haven’t heard of anybody getting a loan under this scheme. They get to a first meeting with the bank and that is as far as it gets. The banks have no interest in lending money.”
Indeed, anecdotal evidence suggests that many of the loans that are being made under the EFG scheme are not actually new funding at all, but merely a transfer of an existing loan or overdraft facility with a small top-up into the scheme.
The banks themselves are certainly not going out of their way to be helpful. Small businesses applying for funding say that getting a response of any kind can take several weeks, with letters going unanswered and their phone calls not returned.
David Hallett is managing director of Carrot Fitness, a health and fitness club in Stourbridge, West Midlands. He said: “We thought that the introduction of a new scheme would help, but it hasn’t made a blind bit of difference. The bank doesn’t return our calls and their attitude on the telephone is not at all helpful.”
Small-business organisations say firms, many of which have been with the same bank for years and know the manager personally, feel betrayed by the shift in attitude.
Stephen Alambritis at the Federation of Small Businesses (FSB) said: “Firms are feeling let down by a bank manager who wanted to know them for the past 10 years but now all of a sudden isn’t returning their phone calls.”
One of the biggest bones of contention is that even though the government has said that banks should not be taking small-business owners’ homes as security for a loan or overdraft made under the EFG scheme, in practice this is exactly what they are doing.
Huw Radley has been trying to negotiate an overdraft facility of £250,000 with Royal Bank of Scotland to support his business Solent Composite Systems, based near Portsmouth, which provides technology and manufacturing for the energy industry. Having initially been prepared to provide an overdraft backed by an unsupported personal guarantee, RBS is now demanding that he put up his home as security, something Radley is refusing to do.
He said: “Quite apart from the fact that we will never do it on that basis, this approach is specifically prohibited within the EFG scheme. However, no amount of discussion or argument will get RBS away from that stance, and of late we are barely on speaking terms as a result of their endless intransigence. We have been in business for five years, and until now have never had any need for any loans. I’m incredibly frustrated and angry.”
Aiden Kelly, who owns Pearce Security, a specialist manufacturing business in Gateshead, has also found himself facing demands from his bank to put his home up as security. He applied for a £100,000 loan under the EFG, of which £30,000 was to replace an existing unsuitable factoring agreement, to help him meet new orders. But he was told by his bank that he would be required to put up his home as security before it could proceed with his application.
Kelly said: “I am frustrated and angry, partly because what the government is saying and what the banks are saying is 100% contradictory. The government can say all it wants about helping small businesses, but if the banks don’t want to do it then they’re not going to. That is the problem.”
Banks are also demanding a whole new raft of personal details and information to support an application for funding that would never have been required in the past.
Roger Paine is the managing director of Video Meeting International, a small video-conferencing business based in Cheltenham. When he unsuccessfully applied for a £30,000 loan under the EFG, he discovered that the bank was more interested in looking at his personal circumstances than the business plan and cashflow projections he presented.
He said: “The banks are not basing their lending decisions on the viability of the business, the business expansion plans, cash-flow projections and current and previous trading history as they should be doing, and as the government states that they are, but on irrelevant personal credit information.
“Apparently this is a new procedure that all the banks are doing without letting businesses know at the beginning of the scheme. The EFG scheme is a complete and utter joke and a waste of time and doesn’t help small businesses that desperately need funding now — not in five weeks’ time. It is a complete load of government spin.”
Meanwhile, the government has made a difficult situation a hundred times worse, say small firms, by suspending the highly popular Small Firms Loan Guarantee (SFLG) scheme when the EFG was launched.
The SFLG scheme was run on similar lines to the EFG, but without the need for such stringent security requirements. And while it was privately loathed by the banks that had to administer it, it was much loved by small-business owners for whom it made a real difference and was seen as having played an important role in supporting small firms as they grew.
In the past the SFLG scheme — in which the government guaranteed 75% of loans made by the banks to small businesses of between £5,000 and £250,000 for up to 10 years — helped small businesses such as The Body Shop, Waterstone’s and Coffee Republic to expand and grow.
Suddenly axing it without warning has delivered a horrible double whammy to small firms, which had been expecting to be able to access it and benefit from it this year. For them the government’s actions have made their situation infinitely more precarious and brought the prospect of insolvency that much closer.
Hay at 2020 said that the loss of the SFLG had delivered a real body blow to many small businesses.
“The SFLG has been around for many years and it has always worked. It was a real shot in the arm for some firms. The rules were clear and there for all to see, and to suddenly stop that scheme and replace it with something else is absolutely crazy. All they needed to do was change the rules of the old scheme very slightly so the banks could lend more or to other businesses.
“There is no rhyme nor reason to it. A lot of small companies are really going to struggle this year without the SFLG. Instead of making it better, the government has actually made the situation 100% worse."
John Evans is director of JRE, based in the Midlands. He said that his firm had in the past received funding from the SFLG and paid it back in full, but he was refused help under the EFG scheme.
He said the provision of the EFG should be taken out of the hands of the high-street banks. “I suggest that we tell the banks to repay all public-
provided funds and set up the Post Office with the capability of putting these monies into the community by the provision of lending by mortgages and overdrafts with proper commercial rules,” he said. “They have the regional infrastructure and could occupy the redundant bank buildings.”
Small businesses are also angry that the government has failed to impose specific controls and conditions on the way the banks lend money under the EFG.
Alambritis at the FSB said that although the government had attempted to do the right thing by making £1.3 billion available for small firms, it had made a fundamental mistake by not putting more conditions in place as to how the banks should distribute it.
“The government had good intentions to bail out the banks in order to bail out small businesses, but what it should have done is been a bit smarter and paid the banks in instalments, pending evidence that they were passing on the money to small businesses.
“The banks are hoodwinking the government by allowing their branch managers to turn people away. The frustration of small businesses is that the banks have been bailed out and helped, and so small businesses then had their expectations raised that it was their turn to be helped out by the banks, but that didn’t happen.”
Justin Hunt, who owns a small business doing commercial contracts for grounds maintenance in East Anglia, thinks the banks and the government could be doing a lot more to support small businesses.
He said: “Britain is not a business-friendly country. When push comes to shove, it is the individual who takes the risk — all of it and with absolutely no help from government or any banks.
“Help doesn’t have to be financial — it could be tax breaks or an easing of red tape, in particular health-and-safety bureaucracy or even bringing in legislation to force companies to pay their bills on time. I get fed up hearing idiots from the government who have never taken a risk in their life or even had a vaguely productive job, telling us how things should be done, or vacillating about how much the government is doing to help the small-business community that they always proclaim is the lifeblood of the economy. It’s nonsense and leaves me in despair.”
Hugh Scott, managing director of data-leakage-prevention firm ASL Security, which has 12 employees and an annual turnover of £1m, is also disillusioned with his bank.
He said: “I submitted a business plan to HSBC before Christmas 2008 and the local commercial manager came to see us and agreed a £50,000 overdraft. I offered a personal guarantee and a debenture on the company. This was all agreed and the security was taken in February. No sooner was the security in place, however, than HSBC changed its mind, blaming the EFG scheme, something it had never mentioned before and offered us only a £20,000 overdraft.
“On the back of the agreed facility, I took on two new salesmen. HSBC is unwinding the security and has refunded all charges, but what a waste of time and effort.”
Frank Stevens, meanwhile, who had hoped to build his new showroom and visitor facility at his Weymouth boat business in time for the Olympics, believes that the real problem is that local bank managers are no longer allowed to make lending decisions.
He has already obtained full planning permission for the new building and amassed a deposit of £250,000 to put towards the £750,000 cost — but without a £500,000 loan from the bank is not able to get started.
He said: “The banks are just doing everything in their power to bolster their balance sheets. I had a meeting with the regional director and he admitted that they were not interested in taking on any new business. I feel very frustrated because the problem with the banks is they are just taking a global view and they are not looking at individual cases. In our case we are sitting literally 300 yards from the site of the sailing Olympics. We might be a bubble that is doing extremely well, but the banks should take account of that.”
Small firms feel that the high-street banks are letting them down in other ways, too. A survey of small firms carried out by the UK200 Group, an association of independent professionals including lawyers and accountants, found that almost half of the respondents said their banks had imposed changes to overdrafts or loans, with 27% claiming that these changes had taken place without notice. Of those surveyed, 13.5% said they had had their overdraft or loan facilities removed altogether.
And a recent survey of 6,000 small businesses by the FSB found that 18% of those taking part said there had been an increase in bank fees compared with last year.
Most respondents said that the interest rate they were being charged on overdrafts and loans was being kept at between 5 and 10 percentage points above Bank rate. A third of the small firms surveyed said their bank was less helpful now than it had been before the credit crunch began.
Small-business organisations are now calling on the banks to act fast to prevent the terrible consequences of their continuing failure to lend.
Alambritis said that the expected loss of some 36,000 small businesses this year would be a tragedy for the whole country. “When small businesses close down they rarely reappear. So you lose that diversity and that choice for consumers.
“Big companies like car giants will close branches and factories and downscale and stop making a certain car. But a small business just closes down and the livelihood of the entrepreneur goes as well.”
Phil Orford, chief executive of the Forum of Private Business, added: “The consequence of small businesses not being able to access adequate finance from lenders is stark — a great many more could be forced to close. Cash must start flowing for the sake of small businesses and the economy as a whole. Time is of the essence.”
Lloyds gets too personal
Lynda Gauld owns public-affairs consultancy Bacchus in Edinburgh.
She contacted her bank, Lloyds TSB, to request a small increase of £3,000 in her business overdraft, only to be told that it would not be approved because she was overdrawn on her personal account with the same bank.
She said: “This was not an issue when I had the initial business overdraft and a business credit card agreed a year ago. We have a cash-flow blip just now and corporation tax due, but the bank wanted me to use the remaining funds in the business account to settle the personal account, or to take out a repayment loan to pay off the personal-account overdraft. I’m very annoyed.
“Instead of assisting a small company that is solvent and in good shape, with an additional £60,000 of contracts signed up and not yet started, with great prospects, we get our personal accounts raked over. My personal financial standing should not have any bearing on my business account, which is exemplary. I have banked with Lloyds TSB for 30 years but am so annoyed I am now in the process of moving my business account elsewhere.”
I’m disappointed and let down by the banks
John Potter owns three Area clothes shops in southern England selling ladies’ fashionwear and accessories, which between them generate a turnover of more than £1.5m. He applied for a loan under the Enterprise Finance Guarantee scheme from Barclays to get some additional working capital but was turned down.
He had been asked by the bank to provide valuations and details of existing mortgage commitments on the directors’ main homes, even though the government has expressly said that banks are not entitled to ask for security based on the owner’s main residence.
“I feel disappointed and let down by Barclays,” said Potter. “I also feel that they are not operating in the spirit of the scheme that was intended by the government. We are very happy to provide full personal guarantees because we believe in the business so much. But I am not happy about Barclays asking for mortgage security on my home, which is specifically excluded from the scheme.
“Clearly the scheme is not working. The government may have good intentions, but I think that the money that has been provided to the banks is just not getting through to small businesses.”
THE ENTERPRISE FINANCE GUARANTEE
THE Enterprise Finance Guarantee scheme was set up by the government this year with the aim of helping viable small businesses that were facing temporary cash-flow difficulties — because of late payments from creditors, for example.
The funding of £1.3 billion, which can be given in the form of loans or overdrafts, is 75% guaranteed by the government and is available to small businesses that have a turnover of up to £25m.
The loans, which are made by high-street banks, can vary in size from £1,000 to £1m and run for a period of up to 10 years.
The government has expressly stated that banks are not allowed to demand a family home as security. They are, though, entitled to ask for personal guarantees of up to 100% from the owners of the business.
Baroness Vadera, the minister for small business, said that the scheme — part of a package of funding measures announced by the government — had so far received eligible applications totalling £115m.
With applications running at a rate of £30m a week, the £1.3 billion should be distributed within the year, as planned.
WHAT FIRMS NEED: OUR MANIFESTO
A speedy response. High-street banks are taking six weeks and longer to respond to applications for funding under the Enterprise Finance Guarantee scheme. But small businesses often need the money quickly to pay wages at the end of the week or buy stock to fulfil orders. At the very least the banks should answer their letters and return their phone calls.
A firm commitment from the banks that they will stop demanding security over business owners’ homes, in line with the government’s recommendations.
Greater power to be given to local bank managers to make lending decisions instead of a faceless credit controller at head office. Branch managers know their local market and the businesses that are operating in it. Also, the ability to build a personal relationship between a business and the bank benefits both sides.
Proper advance notice that existing banking arrangements are about to be changed or new charges introduced.
A greater level of understanding from the banks about the challenges small businesses are facing today. Firms that may have been doing well only six months ago ould be struggling now through no fault of their own and they need practical help, not lectures or blame.
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