Banks continue to scale back SME loans

Speculation has emerged recently that the pre-Budget report would contain measures to counter the ongoing reluctance of banks to lend.

Despite the government’s £37bn equity funding programme and other measures such as guarantees for interbank loans, lenders have widely refused to offer loans to the corporate sector on anything other than the most onerous terms.

But prime minister Gordon Brown told the Commons on 19 November 2008, “We will take all measures necessary to help small businesses get the loan capital they need.” This was being viewed as a hint that the report would extend the small firms loan guarantee scheme.

Until now the scheme has provided government guarantees for 75% of new loans worth up to £250,000 to businesses with sales of up to £5.6m. Borrowers taking part in the scheme have had to pay a 2% premium to the Department for Business, Enterprise and Regulatory Reform (BERR).

Uphill struggle
BERR will have an uphill struggle to counter the criticism being levelled at the banks, which are also under fire for curtailing or even withdrawing existing finance arrangements with the bare minimum of notice.

Eric Anstee, a corporate finance adviser to SMEs, has also served as a finance director of several FTSE-100 companies and as chief executive of the ICAEW. He is seeing several instances of companies being told by their banks that the factoring facilities they had in place are being cut back sharply.

Instead of paying up to 70% to 90% of the value of invoices presented, Anstee reports, the banks are typically saying they will now hand over no more than 50%, if that. “They write to the company and say, ‘You’ve got two or three weeks to take this onboard,’ and that means companies are having to replace existing facilities within weeks or face administration,” he explains. “A lot of banks are taking a very hard line.”

Anstee senses that banks are running scared. “Some banks are saying, ‘If we do it now, we’ll get our money back; if we do it in six weeks’ time, we won’t,” he says. The banks’ factoring arms are emboldened by the fact that it’s relatively easy to get their money back as it is secured on clients’ invoices and it’s easy to cut their exposure by simply stumping up less money on each invoice.

Anstee says companies that haven’t had that phonecall “should be ready for it”. He adds that he has a client who is considering opening another bank account so that any large payments from customers can be paid into it, rather than into the existing account which is heavily in overdraft. Without a second account, he explains, “they’re worried the bank will say, ‘Thanks very much. You’ve dropped your overdraft so we’re cutting your facilities’.”

Given these developments, auditors will be considering the reliance of their clients on bank funding that is increasingly likely to be pulled at short notice when reviewing the ‘going concern’ basis of the accounts they audit.

Anstee’s dealings are mainly with SMEs, but businesses of all sizes will need to look at how vulnerable their SME customer or supplier base is and whether any key players in their supply chain are in danger of having the rug pulled out from under them by their bank. The only silver lining in this cloud would be if any rivals are in danger of being pushed over the edge.