Financial support for small and medium-sized enterprises - Business and Enterprise Committee Contents

Examination of Witnesses (Questions 1-19)


16 DECEMBER 2008

  Q1 Chairman: Good morning. Thank you very much indeed for coming before this Committee today to give us evidence ahead of our session later this morning with a representative group of the banks. Can I begin, as I always do, by asking you to introduce yourselves for the record.

  Mr Frost: David Frost, Director General of the British Chambers of Commerce.

  Mr Cave: Andrew Cave, Head of Policy at the Federation of Small Businesses.

  Mr Izza: Michael Izza, Chief Executive of the Institute of Chartered Accountants in England and Wales.

  Q2  Mr Binley: I want to ask a general background question. It has been suggested that the banks are being stretched and pulled in two very distinct ways. On the one hand they have got the problems of libor, around 3.3 still, I think; at least three of them have 12% to pay back to government each year for the injection of liquidity; and they have got the whole fixed saver scenario, where people are still being paid 5% and 6% on those fixed term accounts; and so they have got a lot of money they have to pay in that direction, and yet they are expected to pass on base rate cuts in full and cut rates generally on lending. Do you think that those conflicting areas of activity are hindering the banks, or do you think they are handle-able and should be handled more effectively than they seem to be at the moment?

  Mr Frost: It is a very difficult issue for the banks—clearly being pulled in a number of different ways and a number of different tasks that they have to balance. My own view would be that it is not a question of "can it be managed" it has to be manageable, because if we are to get through this we need an efficient and effective banking sector working with business.

  Mr Cave: Clearly everybody is in a very difficult position at the moment and the position you have described the banks in is not dissimilar to the position that small businesses find themselves in, being pinched at every quarter. I do not think that those problems are the core reason why lending is not what it should be; I think it is a lack of confidence. There is the money there and I think it is the confidence that we need to see return.

  Mr Izza: I would just add to the point Andrew and David have made that I see the problem slightly differently because I think, on the one hand, banks are being asked to rebuild their capital position and that is something they are being asked to do through regulation. That is causing the banks to de-leverage, which means they have less capacity to mount. On the other hand, the Government are asking them to lend more and to make more available. Both of those aims are perfectly laudable, however they are not exactly easy to reconcile. I think that pressure to rebuild the capital base is actually a very real one.

  Q3  Mr Binley: I agree with that. We have a situation where the banks are facing sizeable difficulties from those conflicting pressures, and we need to bear that in mind when we move on to ask the next question I have in mind. The banks say their lending has not decreased, yet government and business organisations say that access to credit is getting harder not easier. Can you tell me what is going on?

  Mr Frost: It is a very difficult picture and it is an emerging picture. We are carrying out research at the moment over Christmas and into the New Year to get a real fix. All I can say is that we have a substantial amount of evidence on an almost daily basis arriving in our offices from businesses which are facing a more difficult relationship with the banks. Let me start by saying, if we are to get through what is clearly a very, very difficult economic time at the end of it we will require a cohort, a substantial group of businesses who are in a fit state to drive us forward and drive us out of this. The British Chambers of Commerce, whilst we represent from the very largest to the very smallest, at our heart are medium-sized, often family owned businesses, businesses of some very real substance, frequently exposed to global competition, frequently involved in international trade. These will be the businesses that will have to get us out of this mess that we are in now. If we do not find a way of supporting what are at the heart good quality businesses over the next two to three years, then I personally find it very difficult to contemplate how we can get out of this. What we have seen is substantial job losses; unemployment is expected to rise very substantially in 2009; it is the private sector which has taken the hit from that; we are seeing a lot of money factoring capacity; we have seen a huge increase in the number of public sector jobs over the last eight years which is now unsustainable; and we have seen the financial service sector and business service sector being hit. If we are to come out of this, as I say, we will need these good quality businesses which rely on, and have relied on often for generations, good relationships with their banks. So we have to make this relationship work; we have to make it better. Clearly from the evidence that we have coming through it is not all that it should be.

  Q4  Mr Binley: Let me hit you with: how would you make it better?

  Mr Frost: I do not think there are any simple solutions. What I would say at this stage is there are three messages that are coming through to us: firstly, the cost of money is going up—businesses are being charged for things they were not being charged for in the past, for example, arrangement fees; secondly, when it comes to future loans or investment they are being asked for a much great level of personal guarantees, which frequently they are not prepared to do; and, thirdly, it is taking a lot longer to get deals cleared, and therefore when an opportunity comes up for a business to perhaps buy the stock, the assets have gone down and it needs a quick decision and it is not easy to do that. If we can get that relationship to work, if we can have an understanding, then I think that will happen. I have to say, I am encouraged on a number of fronts by this Government's establishment of the Small Business Finance Forum; I am encouraged by the stream of announcements that are now coming out from the banks that you are making clear pledges to support business. To be quite honest, it is going to take a lot of time and a lot of effort to make this happen officially.

  Mr Cave: Going back to your original question about the inconsistencies between what the banks are saying and what small business and the Government are saying, if you look at the data that the Government have collected I think there is a slight question mark over that data; I think it probably needs fine-tuning, and that is something that the banks pointed out during the last meeting. One thing I would say is, from the last Finance Forum, where the data was shared, there was no data there that spotted an increase in the cost of finance—that was not available. At the same time, to run along with that, the FSB set up its Bankwatch programme which uses polling but also the collection of case studies from around the country. On 1st December our data revealed that 30% of small businesses have seen an increase in the cost of finance. We will wait and see what the data that the Government collects says and see how that fits together in the New Year. It is clear from that, and from the case studies, that that is the case. In terms of your second question of how to fix it, I would go back to the point about confidence. A lot of what we are hearing from the banks at the moment is very good. There are some very interesting ideas and measures coming forward, but at the moment it is words; that is not a criticism of the banks, it is just a simple fact that they, like us and everyone else, are looking for solutions but until there is that confidence at grass roots level you are still going to have these behavioural inconsistencies between what you are told by bank chiefs here today and what is actually happening on the ground. That is why I think the one single measure that is extremely useful is the Government's proposal for the Small Business Finance Scheme or rather, as we would prefer to see, something on a much larger scale that has been proposed elsewhere, which will in the short-term get things moving, oil the clogs and get confidence back into the system.

  Mr Izza: In the evidence that we submitted to this Committee we provided you with some figures that said 30% of businesses were finding it more difficult to access capital than a year ago. I do not know how that squares precisely with the data from the banks. I do not know whether on a sector basis they are lending more to particular sectors and whether other sectors are being starved of capital. That is something I think we should wait to hear the banks explain. In terms of: what would I do; what are the solutions? I think a number of things have happened recently that are very positive in this direction, but small and medium-size enterprises have to help themselves as well. They need to get their working capital under control, and traditionally this is a sector of the economy which is not great at that. I welcome a number of the proposals that were in the pre-Budget Report; we need to see those come through, but some of them have the potential to help. I think it is very important that if banks are going to treat small and medium size businesses in the best possible way, those small and medium size businesses need to be as well prepared as they possibly can be to take evidence to the banks of their future viability, presenting business plans, cash flows and taking professional advice where possible.

  Mr Binley: Finally, when the Minister was questioned he intimated that he was monitoring the relationship between SMEs and the banks. In terms of lending he was monitoring the whole of that process. When pushed for figures he was unable to give figures. This is one of the problems, is it not, that we just do not have the facts. Would one of your messages be: we really need some quick, real and meaningful information?

  Chairman: I am actually going to leave that question to one side because Adrian Bailey is going to ask that later on.

  Miss Kirkbride: I just want to go back and probably Mr Izza would be the best person to answer this because I think all on this committee do very much blame the banks for a lot of the trouble that we are in today, but we are in this trouble and now we need them to get us out of this trouble by lending more. What you were saying earlier is of course one of the principal reasons why they are not lending more, because they are caught in a cleft stick of having to rebuild their capital bases whist at the same time being beaten over the head by the rest of us to lend more money for very, very important reasons to businesses. I just wonder what your observations are on the Government's rescue of the banks and how it was structured. For example, Brian mentioned that although it is very welcome from the taxpayers' point of view—a 12% interest rate—is that really realistic when the Fed is asking 5% in America for its return on capital for the injections put into the banks?

  Q5  Chairman: This is the preference shares.

  Mr Izza: Chairman, I am not here as apologist for banks but I do understand that the business environment we are in today has changed markedly from a year go, it has changed markedly from three months ago, and banks are re-pricing risk: businesses that perhaps are seeing a decline in their trading activity, or perhaps have seen asset prices and values fall, are going to be looked at differently by banks seeking to lend. On your specific question, I think that the recapitalisation of the banks was not necessarily in the first instance to promote lending, it was to bring stability back to the market because there was a massive crisis of confidence. It actually succeeded in doing that but one of the characteristics of this crisis is that we are moving through different phases. We started with sub prime loans; we moved through into liquidity problems; then the commercial paper market dried up; we potentially have got a going concern issue; and as we look forward into 2009 there are some other icebergs that are sitting there that, unless we are careful about it, we are going to encounter. I think that the Government's rescue plan was appropriate for what was intended to do, but perhaps we need another solution and other actions now to deal with the specific issues.

  Q6  Miss Kirkbride: Just out of interest, what are the icebergs?

  Mr Izza: One of them might be that we understand in the next 18 to 24 months there is £200 billion of private equity, senior debt, and mezzanine financing that is going to have to be replaced or renegotiated. There is not enough capacity in the system to do that at the moment. That is a problem for another day.

  Q7  Mr Hoyle: Mr Cave suggested that somewhere else there were better suggestions. The trouble is it is where we are at, and he has got to put his partisan views to one side and look at the situation as it is. I think you are hinting at the Party you are a member of, but let us look at the situation now. It is about liquidity; it is about inter-bank lending, which is taking place; but it is about bringing other monies into the market. Are big businesses part of the problem where they are just not paying their bills and demanding that small businesses wait but also, if you want to be paid early, they have to be discounted? Is this not one of the problems?

  Mr Cave: I would like to answer that in two sections. First of all, it is an extraordinary suggestion that I am partisan in some way. If you actually look at the way this process has evolved, the Federation of Small Businesses came forward with a proposal for a £1 billion survival fund for small businesses which was, we were delighted, adopted in the pre-Budget Report; and, from meetings we have had with officials, is likely to be implemented in remarkably similar ways to the ways we proposed. When we proposed that billion pound fund we were pretty much laughed at by everybody for it being excessive. Things are moving very fast, and I think we have since seen, yes, a proposal has come forward from the Conservatives which is very, very similar to what the Government have proposed but actually involves more money. A billion pounds is great, it gets the oil in the cogs working, but it is likely only to last for a matter of two months we are told by the banks.

  Q8  Mr Hoyle: But it can be reviewed, can it not?

  Mr Cave: It can be reviewed. We would like to see it reviewed and expanded. That is what I am referring to there. When it comes to late payments, yes, this is a big problem. One of the reasons why so many of our members are looking for help from the banks is because they are waiting for payment. This is a very difficult issue to tackle—other countries have tried it and failed, but there are a couple of things we would like to see proposed from the outset; that the Companies Act is actually enforced as it was first intended—it has never been fully enforced; and also Companies House, which is essentially a filing agency at the moment, be turned into a proper enforcement agency. Companies have to register their payment terms with Companies House, but in recent years that has fallen slightly to the wayside for some companies. We would like to see that much more in evidence. We would like to see Companies House have the proper resources to actually enforce that, and for Companies House to be able to name and shame those companies that are not playing by the rules because essentially this is antisocial behaviour and it leads to job losses. It is something we feel very strongly about.

  Q9  Mr Hoyle: ASBOs for companies. That is a new line but I quite like it. Anything that will work—I will take ASBOs! The second part being that of course the Government, quite rightly, has insisted that government departments wherever possible pay between 10 and 15 days; and they have requested the same of local authorities; but I have heard of evidence that says local authorities are dragging people out for 90 days. Is this true?

  Mr Cave: We have heard that that is the case. We have also seen evidence where a local authority will send a letter to a small business that has already provided a service saying, "We will pay up within a certain time if you meet this criteria relating to something else". That particular letter was then withdrawn after an outcry and a bit of attention from the local media. I will be honest with you, it is a bit early to tell. We are still talking to our organisation on the ground. It is very positive that local authorities have taken this step, and police forces around the country, but I think it is early in the New Year when we will see the results.

  Q10  Mr Hoyle: The NHS and everybody else?

  Mr Cave: Exactly.

  Mr Frost: The question goes to the heart of the matter. Businesses rarely go bust because of lack of orders; they go bust because of lack of cash. At the moment what is happening is they are caught in the crossfire. You talk about the relationships with the banks but, on the other hand, we now have issues with credit insurance; and then, of course, you have this whole issue about payment terms both with customers and suppliers. Everybody is putting the screw on and the poor guys who are caught in the middle are these small businesses. If we do not resolve this and, as I say, cash becomes king at the moment, then you are going to see a wave of unnecessary closures during the next 12 months.

  Q11  Mr Clapham: Is there not another side to this though? We heard, for example, Mr Frost say quite clearly that the way out of this mess is to get the small and medium size enterprises really working; and that, of course, means engagement with the banks; it means a responsibility on part of the banks to respond in a way that is going to facilitate that, and yet that is not happening. Does it not suggest that the banks really do not understand the small and medium size enterprises?

  Mr Cave: That is a very interesting question and it is one that we are asking and are having conversations with our own members and with the banks about. I was having a conversation with someone in the corridor about this—there is a problem at the moment that there is fear on both sides of the divide. Branch managers are scared of making the wrong decision and, from our part, a lot of the small business owners are scared about going and talking to their bank managers; they just want to get on with their business and hope that everything will be okay. It is human nature that if you think there may be a problem there will be. We are always advising our members to go and talk to their banks and to their accountants at the earliest possible time to avoid problems. Equally, there are the behavioural inconsistencies that need to be ironed out in the banks so that branch managers have the confidence from their line managers to make the right call. That is an issue. With regard to the second point to your question—is there a lack of understanding on the part of the banks as to what is a viable business and how to lend to businesses—a lot of our elder members and elder businesses they do say that, because they remember a time when there were more branch managers and there was a better relationship on a personal level. I think those personal relationships made a big difference, because you had that trust and a much better understanding, rather than relying solely on a business model which does not always reveal everything. It is interesting—the current crisis has shone a light on a problem in that area.

  Mr Frost: I would be pretty worried if banks did not understand small businesses. We really would have a problem. I have no evidence that they do not, but I think there are two issues that come out of it. Many businesses have not experienced the economic times we have now in their lifetime. The point was made earlier, when they do get into difficulties or start getting into difficulties it is important that they are taking proper advice, and not just rushing to the bank and saying, "Help I can't pay the wages on Friday", because I think I know what the response to that would be. I think the second thing is there is evidence of banks making certain sectors no-go areas. I think, for example, anything to do with property and development, from the evidence we have, appears to be off-limits at the moment. Those of us who have been around a bit—and this is my third recession—would know that even in difficult times there are companies that do very, very well indeed. There are companies that are able to take advantage of opportunity. I think therefore that the banks need perhaps to be cognisant that not every business in certain sectors is essentially a no-hoper—there are opportunities.

  Q12  Mr Clapham: I hear what you say but let me give you an example. I will not name the company but I went down to see one of my small and medium size enterprises, a printer, who prints the forms that the banks use, and yet the business was rolling in but the credit was not and that was causing a real difficulty. That suggests to me that there is a lack of understanding somewhere. We come to the statistics that Mr Izza referred to that 30% of small and medium size enterprises are finding it difficult. That suggests that there is a misunderstanding somewhere; and if there is a misunderstanding has that occurred before the crises; was there a disengagement with small and medium size enterprises before the crisis came about leading to a greater misunderstanding in the crisis?

  Mr Izza: Chairman, all I can add to what has been said already before is that the evidence we have is entirely anecdotal; but there is frustration among the small and medium size entrepreneurs that they are not able to build a relationship with people because they do not stay around long enough; and because banks rely on automated credit-scoring systems to evaluate whether or not a loan can be made that does not necessarily allow for human intervention when someone really does understand that this business has prospects.

  Q13  Mr Clapham: Just turning to the situation as it is at present. We have heard, for example, Mr Frost give three points where he thinks the banks could be much more responsive to the current situation. Are you satisfied with the measures that have been put in place by the banks to actually deal with small and medium size enterprise, or are there other things that they could do? If there are other things that they could do, what should they be doing?

  Mr Cave: If you look at the measures that have been announced over the last few weeks there are some very interesting things there. Obviously the price fix that was announced by RBS was very welcome, and we would like to see others move towards that. The other interesting thing that RBS have proposed is what they call the "grey beards", the mentoring service, which very much deals with the point you have raised. We have not discussed this in as much detail with RBS as I would like, and it would be interesting to see why they have taken that decision and whether that is a decision that should be looked at by the other banks as well. If you look at behaviour, we had the Statement of Principles that were approved last week which we were supportive of, but we did have concerns about that and we had those concerns adopted. In particular was the issue of switching bank accounts. Our survey data from last year reveals that 45% of businesses have trouble switching their banks. If you have got a problem with your bank it is an open marketplace and you should be able to go and move across but it proves very difficult for them. As of last week, there is a commitment with the switching of bank accounts that if you wish to switch the process should take no more than five days, and hopefully this will become legally binding. We are moving in the right direction, so I think progress is being made.

  Mr Izza: We would also very much welcome the moves made in recent weeks, particularly by RBS and Lloyds TSB; but at the moment it is too early to call whether or not that has actually produced a change in behaviour, and whether or not it will actually percolate through. The direction of travel, certainly as far as those two banks is concerned, is very promising.

  Q14  Roger Berry: Do you not think, although welcome, that these are incredibly modest measures given the scale of the problems? The switching of bank accounts in five days, does the crisis not require something a bit stronger as a response than these measures?

  Mr Cave: Yes, you are right, it does.

  Q15  Roger Berry: I am sitting here thinking there is a degree of unreality about the whole of this discussion so far.

  Mr Cave: You have got things moving on two tracks really. You have got things that have to solve the immediate problem, and you have also got the point that a light has been shone on the problem in relationships between small business customers and banks. We need to deal with that, but that is more of a medium-term thing. Sorting the medium-term issues out now will hopefully avoid this problem happening n the future. In terms of the short-term changes, yes, none of this is going to scratch the surface of it; but that is where I would come back to the issue of confidence. The recapitalisation process of banks has not been felt yet. We are not going to see changes as we would like to see them until the early to middle part of next year I would think. When you talk about the immediate problems that is where you do need Government intervention in the form that we are now seeing to actually get things moving.

  Q16  Chairman: Is there any particular difference of patterns small businesses are experiencing between loan funding and overdraft funding? It is overdrafts they want at present to get them through working capital situations rather than loans.

  Mr Cave: We have anecdotal information on that, but we do not have any detailed survey data on the differences between the two.

  Q17  Mr Weir: You talked about the cost of finance and that businesses were suffering; but it is not so much in many cases, certainly from businesses that have approached me, that the cost is rising but that it is not falling in line with interest rate cuts. When interest rates are being cut the banks are actually just putting up their cut of the interest rate, so the interest rate charged by the business is exactly the same as it was previously. Is that something you are finding and, if so, what is the point of the Bank of England slashing interest rates if it has no benefit to their business whatsoever?

  Mr Frost: I think it is having some benefit and feeding through, but clearly it is not falling at the rate that business would expect it to. As regards the other aspects of the cost of money, as I have said, the issue is charges being introduced, arrangement fees for, say, £5,000 which last year would have had no fee attached to them.

  Q18  Mr Weir: Moving on to the Institute of Chartered Accountants, obviously you have raised concerns, Mr Izza, regarding the fact that many accounts may be in effect qualified because the banks are not prepared to guarantee credit lines in the future. Can you tell us a little more about this and the effect that may have on businesses getting into a vicious circle where they will be undermined because of the banks refusing to guarantee credit for any length of time?

  Mr Izza: When the directors of a company prepare a set of financial statements they have to prepare those financial statements on the basis that the company is a going concern; so they look into the foreseeable future and they see there is nothing that might cause the company, for example, to go into administration or liquidation. Taking into account all the factors, they will then prepare that set of accounts and the auditors will then look at it and decide whether or not they agree with the assessment that the directors have made. This year end we had an extraordinary set of circumstances. Normally when this exercise is being done it is the particular circumstances of the company that are first and foremost. At the moment, when people look at whether or not their business prospects are good, they are looking at the environment they are in, and that is actually a major factor. Being able to assess whether or not a bank is going to lend when a facility comes up for renewal in six, nine or 12 months, they just do not know now. We understand from conversations that are taking places that banks, perhaps understandably, are very reticent to give a commitment six, nine or 12 months out because of the uncertainty surrounding the whole position. If that is the case, if the auditors agree with the assessment that the directors have made, they would issue a modified audit report. That would say that the directors have disclosed in the financial statements that there are potential issues and we agree, and we draw your attention to paragraph 22. If they do not agree with the directors' assessment they issue a qualified audit report which says that the auditors have serious concerns about the company's ability to continue. Historically, there have always been a number of modified and qualified audit reports issued but we are talking in a normal year of that being a very low percentage—certainly less than 5%. This year end we could be talking about double digits, and we are concerned recipients of these financial statements might conclude, incorrectly, that this company was in trouble and take action there, which is unfortunate.

  Q19  Mr Weir: It almost seems a Kafkaesque situation, because presumably in the case of most small businesses the main people looking at these to decide whether they are creditworthy would be the banks themselves who are causing the problem by refusing to guarantee the credit line. What is the point of it all? Surely if a small business is going to a bank looking for credit and presenting their accounts which are qualified, due to the fact that the bank would not give the guarantee in the first instance, it just seems slightly mad to an outsider?

  Mr Izza: There is a certain amount of circularity about it, as you say. It is not just the banks; it is investors; it is potential investors; it is landlords; it is suppliers; and it is customers. They all use the statements and they all might draw the wrong inference if they have not been educated.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2009
Prepared 23 March 2009