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.