Memorandum submitted by the Mayor of London
INTRODUCTION
1. In preparing the Economic Recovery Action
Plan for London, the Mayor has met with business representative
organisations and banks as well as reviewing the evidence on the
availability of finance for small and medium-sized businesses
in the capital. This submission includes:
(a) evidence of the availability of credit in
London for Small and Medium Sized Enterprises (SMEs);
(b) views of business representative organisations
in London;
(c) perspective of the banks; and
(d) recommendations for Action.
EXECUTIVE SUMMARY
2. Evidence from the Business Link in London
service suggests that access to finance appears to be the major
problem for all companies irrespective of size or sector, and
it is the issue that needs to be addressed the most urgently.
The Mayor has heard of banks refusing to increase overdrafts or
even reducing existing overdraft facilities (even where SMEs are
sound), banks re-pricing their fees when reviewing overdraft facilities
and SMEs shutting down entirely, due to problems with credit arrangements
with their bank.
3. A number of banks have provided details
of their arrangements to support small businesses through the
downturn and this is to be welcomed. The Mayor wants to see best
practice and public commitments along these lines consistent across
all the major banks.
4. The Government's Pre Budget Report contains
a number of measures that aim to help cashflow in small businesses
and business overall by reducing costs. In particular the £5
billion package comprising the small business finance scheme and
loans from the European Investment Bank should, if well and speedily
implemented, give critical help to small firms in need. In light
of evidence that there are behavioural inconsistencies at branch
level in relation to new schemes available to SMEs, banks should
confirm their commitment to implementing these support measures
speedily and consistently.
EVIDENCE OF
THE AVAILABILITY
OF CREDIT
IN LONDON
FOR SMES
5. The Mayor has received information from
Business Link in London, who deal with front line enquiries from
SMEs.
6. Accessing finance continues to be the
primary issue for London's businesses. Client Service Managers
in Business Link have reported a number of instances where banks
have refused to increase overdrafts. They have also been advised
by clients that when reviewing overdraft facilities that in some
cases the banks are re-pricing their fees. In the past couple
of months several of Business Link in London's clients have had
their overdraft facilities reduced, even though they report that
their businesses were sound.
7. Three clients of one Client Service Manager
reported that they were left with no alterative but to close their
businesses due to the lack of funding support, one of which was
a social enterprise that couldn't access emergency funding. Another
example of how a lack of access to working capital is affecting
businesses is an ethnic food manufacturer unable to fund the purchase
of raw materials to fulfil orders.
8. The vast majority of calls from established
business owners to Business Link in London's contact centre again
relate to accessing finance, many seeking advice on ways to raise
finance via alternative avenues than traditional bank finance.
There has been an increased number of enquiries about the Small
Firms Loan Guarantee scheme and also requests for information
on the measures to help SMEs raise finance announced in the 2008
Pre-Budget Report.
9. So far, problems that are being experienced
by larger companies appear more likely to be related to accessing
finance. A well-established, profitable importer/distributor of
pharmaceuticals with a turnover of £18 million is having
its £100,000 overdraft and invoice discounting facility re-priced
by its bank. The company is trying to arrange a meeting with lending
managers to conduct negotiations, rather than accept the bank's
carte blanche approach.
10. It remains a difficult time for the
property and construction sectors or those businesses relying
on strong demand from these sectors. Similarly, businesses whose
customers are based in the City are either suffering or predicting
a fall in their turnover.
11. More wholesale and retail companies
are feeling the effects of the economic downturn. In one case,
a client's turnover has fallen by 50% in the past couple of months.
12. The hotel sector suffered a downturn
in October for the first time. It does appear that trading conditions
are becoming more challenging for restaurants too, evidenced by
a lack of forward bookings for the festive season. This may be
having a knock-on effect on related sectors. A £2 million
West London-based food manufacturer, supplying products to central
London hotels, restaurants and quality food outlets has recently
seen its turnover drop by 50%.
13. Feedback indicates that a broad spectrum
of businesses providing non core/essential services that are not
currently experiencing problems, fear they may do so, as the recession
deepens. Examples include a training company and a beauty treatment
business.
VIEWS OF
BUSINESS REPRESENTATIVE
ORGANISATIONS IN
LONDON
14. 35% of London Chamber of Commerce and
Industry members reported "increased conditions and/or charges
to their credit streams" in their October survey.
15. Many small businesses believe that strategic
decisions taken at board level are not always passed down to branch
managers. For example there are "behavioural inconsistencies"
over the Small Loans Guarantee Scheme and the European Investment
Bank schemes where branch managers either do not know about them
or are unwilling to offer them to customers.
16. The Federation of Small Businesses (FSB)
reports that small businesses are net depositors of £55 billion
with the banks while net lending to small businesses is £44
billion. This parity of deposits shows lending to small businesses
to be low risk.
17. The CBI London Business Survey was carried
out in the last two weeks of September and prospects are likely
to have declined further since. The Survey found over a third
of businesses questioned reported deterioration in the availability
of capital (10% seeing deterioration as significant). The sectors
reporting the most deterioration in availability of capital are
one) banking, finance and insurance (67%), as well we hospitality,
leisure, restaurants, retail (57%). Impact is seen as currently
less for the transport, ICT and professional services sectors.
However these three sectors are the most pessimistic about future
business prospects (67%, 43% and 33% respectively).
18. The biggest problem from the CBI study,
appears to be "Raising finance for capital investment"
(46%), in particular for the manufacturing and construction sector.
This is followed by "difficulties with working capital"
(41%), specifically in banking and retail.
19. CBI comments that the Government's Pre
Budget Report business finance measures, the deferment of the
1% increase in corporation tax rates together with opportunities
to reschedule tax payments should benefit small businesses.
20. The survey suggests that larger firms
are, at the moment being hit harder than smaller ones (43% against
25%).
21. The FSB notes that business finance
brokers are reporting that a major problem faced by SMEs is that
the banks at branch level no longer have the expertise in the
branch to assist small businesses.
22. London First suggests that over time
the Government should explore whether there should be automatic
stabilisers in banking regulation as elsewhere in the economy,
so capital adequacy requirements rise in the boom times and fall
in the downturn. Another important role for government is data
collection: we need to understand what the aggregate lending needs
of business are, and how they change with the business cycle and
risk profiles change, and current data isn't robust enough.
PERSPECTIVE OF
THE BANKS
23. On 4 December 2008, the Mayor met with
representatives of Abbey, Royal Bank of Scotland, HBOS, TSB, HSBC
and the British Bankers Association.
24. A British Bankers Association survey
shows that lending to small businesses grew by just under £1
billion in the third quarter of 2008. This was marginally lower
than in the second quarter and in the corresponding quarter of
2007.
25. A number of banks have provided details
of their arrangements to support small businesses through the
downturn. This includes RBS that has committed overdraft facilities
for small business with a turnover of less than £1 million
and no rise in pricing of these facilities unless there is an
associated rise in risk or breach in terms and conditions as well
as establishing a 500 strong team of business advisers.
26. Lloyds TSB has committed to passing
on interest rate cuts in full and not changing price or availability
of overdrafts during the period of agreement (usually 12 months)
and not changing terms on renewal unless risks associated with
the customer have changed materially.
27. The banks noted there had been a massive
reduction in the number of lenders active in the market over the
last 18 months as secondary lending institutions had withdrawn
from the market, and that SMEs were also being squeezed by their
suppliers withdrawing credit terms, and their customers taking
longer to pay them. They therefore consider that whilst the major
banks are supplying as much credit to businesses as previously,
the total supply has reduced whilst the need for credit has much
increased.
28. The banks also suggested that given
the downturn in demand in the economy, they considered many SMEs
did not have a viable business plan in place to match the changed
economic situation and therefore were not good credit risks, and
the key step needed was often therefore for the SMEs themselves
to review and update their business plans before seeking financial
support. Some banks are supporting business advice seminars to
try to assist this process.
RECOMMENDATIONS FOR
ACTION
29. The Government's Pre-Budget Report contains
a number of measures that aim to help cashflow in small businesses
and business overall by reducing costs. In particular the £5
billion package comprising the small business finance scheme and
loans from the European Investment Bank should, if well and speedily
implemented, will give critical help to small firms in need. In
light of the evidence that there are behavioural inconsistencies
at branch level in relation to new schemes available to SMEs,
banks should confirm their commitment to implementing these support
measures speedily and consistently.
30. Some banks have given certainty to business
customers confirming they will not withdraw facilities but the
rest of the sector needs to follow suit with some urgency. The
Mayor wants to see best practice and public commitments along
these lines consistent across all the major banks.
31. Banks should not prioritise lending
to start ups against established businesses that might not have
business plans etc but who have a record of financial responsibility.
32. Banks are in a position to contribute
in a number of ways to achieving public policy objectives, for
example in their employment and training practices (including
handling of redundancies) and in providing finance for investment
regeneration and this should also be encouraged.
33. Banks can also demonstrate their ongoing
commitment to addressing longer-term structural market failures.
The London Development Agency is seeking bank support for programmes
such as Gateway to Investment, to help early stage High Growth
SMEs to be better prepared to access equity finance from commercial
sources and the Access to Finance programme which focuses on the
strategic business barriers to growth faced by small and new businesses
raising start up and development finance and in identifying and
accessing new market opportunities.
34. The Mayor also considers that there
are opportunities for banks to better understand and support mortgages
for shared ownership, and that they can work with the Homes and
Communities Agency to explore ways of helping people in mortgage
difficulties to stay in their homes by taking an equity stake.
December 2008
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