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SME access to finance

New ICAEW research shows SME and bank relationships are damaged . What needs to happen next? Clive Lewis.

In an early January 2011 tour of the regions, the prime minister stated that the biggest challenge in creating more jobs was bank lending. It is worrying, therefore, that ICAEW research on SMEs’ ability to access bank finance, published in January, suggests that relationships between the banks and small and medium enterprises (SMEs) has broken down.

The research, undertaken by Ipsos MORI, sought the views of partners in practice advising SMEs on raising finance. These advisers are people at the critical juncture between small businesses and banks. We contacted 21 partners in practices of varying sizes. Respondents had on average 15-20 years’ experience in dealing with the SME sector.

Our research and the accompanying policy recommendations (copies of which have been sent to the chancellor and the business secretary) offer suggestions that would contribute to an improvement in SME access to finance – a prerequisite for a thriving UK private sector recovery.

Banks should empower their relationship managers, which, together with greater local discretion to agree credit applications, would help restore confidence and contribute to a significant improvement in bank/SME relationships.

In addition, banks should do more signposting to other sources of advice including accountants and a government-endorsed mentoring scheme.

Banks should commit to a 28-day turnaround for 95% of finance applications. Rejections should be accompanied by advice regarding whether the business would be successful with alternative forms of finance and if so, which ones and from whom. And there needs to be a clear appeals process for those businesses that wish to take rejection to a higher level within the bank.

The BBA has now set up a roundtable with the leading business organisations, including the ICAEW, to ensure the recommendations of its taskforce are implemented. The ICAEW and its membership – with its unique insight – are in discussion with the BBA and will work with government, banks and policy makers to ensure we improve the bank/SME relationship.

Clive Lewis is ICAEW head of enterprise. Read the ICAEW SME Access to Finance Research Report January 2011 and other related information on the issues.

Angela Knight, CEO of the British Bankers’ Association, will provide progress updates on the BBA’s taskforce recommendations.

The Department for Business, Innovation and Skills has released Results From the 2010 Survey of Mid-Cap Businesses (URN 10/P108), a follow-up survey on 2009 research into companies having difficulty raising bank finance.

ICAEW Key Research Findings

SMEs have adapted to the new reality and focus on the fundamentals

Demand for finance remains muted and not expected to rise in the short term. Many UK businesses are trading within existing debt facilities or even repaying debt while interest rates are low. Most feel the economic picture remains difficult to read.

Banks applying tougher terms and conditions on credit applications

Banks are much more risk averse now than pre-recession when it comes to lending, with tougher terms and conditions and criteria to meet, with increased requirements for security and personal guarantees.

Relationships between banks and SMEs have broken down

Perhaps the most surprising aspect of the research is the extent to which our report suggests individual bank/business relationships have been damaged. The research suggests that the poor relationship is exacerbated by the perceived loss of power of banks’ relationship managers.

SMEs need to display good financial management when accessing finances

Our research suggests well managed, viable businesses with good track records have been able to obtain the finance they require, albeit at greater cost and with tougher conditions.

Dismantling the barriers: Angela Knight, CEO, British Bankers’ A

Angela Knight

Much has been said about how hard it is for businesses to get credit. I am not diminishing problems businesses may be facing. I applaud those who have been able to chase down orders in the current economic conditions. But, at the same time, official sources tell another story – that demand for borrowing has reduced, while the supply of lending is steady – and the banks’ own statistics show that businesses are reducing overheads and repaying debt, not taking on new loans. For instance, the Bank of England’s most recent Credit Conditions Survey reports credit availability for businesses is stable and has been mostly on the rise over the past two years.

Meanwhile the Department for Business, Innovation and Skills (in its 2010 finance survey of mid-cap businesses) found the proportion of mid-cap businesses seeking finance had fallen from 41% in 2009 to 32% in 2010. And the figures we collect from our member banks show that banks are providing around £500m in new lending to small businesses every month. But clearly, somewhere between these two tales something was adrift. This was why, over the summer, the UK’s biggest banks came together under the umbrella of the Business Finance Taskforce, to identify the barriers to business credit and to see what could be done to move them out of the way.

Apart from establishing a fund targeted at growing businesses, one of the key findings was that banks needed to work much more closely with other business and professional bodies to do two key things.

The first was to make sure, when businesses went looking for credit, they had gathered together all the information needed and which would give lenders a true picture of the business. And the second was that, when banks could not lend, there was a network in place to point people in the direction of others who might be able to help. This is why we are working closely with the ICAEW so we all know what is being looked for.

That means our mutual customers approach lenders armed with all the right information and a considered plan that shows how any loan can be repaid. And we will be taking the show on the road so lenders and members of professional bodies can meet customers face-to-face.