Memorandum submitted by ACCA



The deepening financial crisis and poor economic outlook have lowered expectations of SME creditworthiness and made lenders more risk-averse.


Though lending is still increasing overall, the supply of working capital through overdraft facilities is decreasing in real terms. With lenders losing credibility, an advice gap has emerged just when SMEs need advice the most.


The SME sector is more financially robust than it was during the last recession, and appears to be more creditworthy than big business.


The Government's response should acknowledge the systemic nature of supply chain risk and work through the existing credit supply chain, offering guarantees for default and credit risk to reduce risk-aversion.


Assistance to the SMEs will be funded by debt; Government must not lose sight of its cost or it will jeopardise the sector's recovery.




1.1 ACCA is the global body for professional accountants. We aim to offer business-relevant, first-choice qualifications to people around the world who seek a rewarding career in accountancy, finance and management.


1.2 ACCA has its headquarters in London and 53,000 of our members are based in the UK. Globally, we support our 122,000 members and 325,000 students throughout their careers, providing services through a network of 80 offices and centres around the world. 56% of our members in the UK work in or for a small and mediums-sized enterprise (SME) and we have over 100 years' experience in understanding and supporting small firms. Independent research shows consistently that accountants are the first choice advisors of small businesses.


1.3 Given that our members advise their small business clients on a daily basis on tax matters, we are well placed to comment on issues affecting SMEs. ACCA is a formal member of the Small Business Advisory Group and a key member of a range of Inland Revenue groups which consider tax matters and how they impact on small firms.


1.4 ACCA organises leading SME events across the Globe working with key local stakeholders, other international bodies and national Governments.


1.5 ACCA also acts as secretariat to the All Party Parliamentary Small Business Group, chaired by Andy Love MP, which exists to further the aims of small businesses and to provide feedback on small business issues to Parliament. Founded in 1997, the APPSBG has grown in prominence and is now believed to be one of the largest all-party parliamentary group in the UK with around 400 members from the House of Commons and House of Lords.




2.0 Working capital at risk as lending slows


2.1 Information emerging concerning trends in SME lending can appear contradictory. Banks claim to have increased lending to small businesses by nearly 10% in the past year[1], while small business organisations offer a numerous examples of credit becoming tighter and more expensive.[2]


2.2 Closer inspection (see Table 1) reveals that both sides are right to some extent. The latest BBA data reveal that, for the average small business, term lending has increased by more than 4% in real terms, but overdrafts have fallen by at least 3% in the past year. Deposits also fell in real terms.


2.3 Additionally, data on lending during the latest quarter (Q3 2008) reflect a deepening financial crisis. Growth in term lending per SME slowed substantially and deposits fell sharply. In fact, if increases in business costs are taken into account (rather than consumer inflation), both the average overdraft and overall lending to the average SME fell in real terms. The fact that overdraft lending tightened at a slower rate in Q3 is only mildly encouraging.


2.4 The data suggest that restoring the availability of working capital, rather than credit in general, is now the priority. Even when security is offered, overdrafts suffer from not being tied to a specific programme of use whose returns lenders can forecast with some confidence. The latter point is reinforced by anecdotal evidence of lenders asking for frequent and detailed cash flow statements, thus attempting to introduce more transparency into overdrafts.


2.5 Despite these worrying developments, small business credit needs to be put into context of overall business lending. Credit is tightening much faster for larger firms than for small businesses, reflecting the healthier finances of the latter. Total lending to non-financial firms of all sizes grew only by 6.5% year-on-year and deposits actually fell by 5.2%.[3]


2.6. Finally, the SME sector is in much better financial shape currently than it was during the last recession. Even in hard-hit sectors such as manufacturing and construction, small businesses are still net lenders to financial institutions,[4] while in 1991 they were weighed down by 21.1bn of net debt. Overdrafts, the most problematic area of the SME finance supply chain, now account for only about 17% of all lending to SMEs, down from 58% at the end of 1991.[5]


3.0 Justified pessimism, irrational fear lie behind tightening credit

3.1 According to the BoE, the stark economic outlook is the main reason for tightening credit.[6] Banks naturally need to anticipate that there will be fewer creditworthy businesses in a recession than during times of rapid growth.

3.2 But the BoE also notes that lenders have become more risk-averse.[7] In practice this means that creditworthy SMEs cannot access finance because banks cannot be sure how much risk they are undertaking or what levels of lending they will be able to sustain should the financial crisis deteriorate further.[8]

3.3 Finally, while secured lending is affected to a lesser extent, using security has itself become more difficult due to falling property and asset prices.

3.4 It is important to remember that some of the increase in risk aversion is fully justified. The government must only seek to discourage risk aversion that is irrational and driven by fear.

4.0 Pockets of poor practice are fuelling an advice gap

4.1 While tightening credit does not constitute poor commercial practice in principle, it can translate as such, especially in the absence of competition.[9] Complaints from small businesses tend to concern new charges, higher interest rates, reduced overdraft facilities or withdrawal of previously agreed loans.

4.2 Though the Banking Code commits its signatories to 30 days' notice of such changes[10], this will not be sufficient in all cases. The withdrawal of overdraft facilities, for instance, may require a small business to seek alternative sources of finance or reconsider the scale of their operations - both lengthy processes.

4.3 Some SME organisations have also drawn attention to the quality of advice provided by lenders, citing a lack of experienced personnel authorised to provide personalised service.[11] There is even anecdotal evidence of lenders encouraging late payment as a form of free credit.

4.4 Apart from its adverse effect on SMEs' cash flow, it appears that poor practice has compromised the relationship between lenders and SMEs and the credibility of the former as a source of advice. This threatens to create a substantial advice gap that the sector cannot afford given the current economic outlook.


Table 1. Small business lending trends, year-on-year and quarterly.








Last year


Nominal Growth


Real Growth

(Q3 2007 - Q3 2008)










Per customer



Per customer

Term Lending














Total Lending





















Last quarter


Nominal Growth


Real Growth

(Q2 2008 - Q3 2008)










Per customer



Per customer

Term Lending














Total Lending





















Last quarter (annualised)


Nominal Growth


Real Growth

(Q2 2008 - Q3 2008)










Per customer



Per customer

Term Lending














Total Lending





















Customer, lending and deposit totals taken from BBA, 'Support for Small Business Q3 2008'. The BBA defines any business with less than 1m of turnover as a small business. Assuming all turnover passes through an SME's main bank account, this encompasses about 92% of all SMEs. (Cosh et al.)


Real growth rates computed using CPI data from BoE Inflation Report, Q3 2008. Note that the CPI does not measure changes in small business input prices. BoE estimates of private sector cost inflation are not available past Q2 2008. However, if the rate of private sector cost growth in Q2 2008 is assumed to have persisted in Q3, then both term lending and overdrafts per SME have fallen in real terms. This is not unlikely as consumer inflation was higher than Q2 2008 levels throughout Q3 2008.


5.0 Financing SMEs in the recession: Key principles


5.1 Professional advice has never been more valuable. To prepare for an even sharper downturn in 2009, more SMEs will need independent advice to help them manage their resources, navigate the range of finance products, build relationships with lenders and, if necessary, compare and switch between banks. As the latter lose credibility,[12] accountants need to fulfil their role as intermediaries between SMEs and lenders.[13]


5.2 Supply chain risk is systemic. Healthy SMEs can still fail if they cannot rely on their customers for payment and their suppliers for delivery. Supply chains conduct risk both upstream and downstream, and the more lean and efficient they are, the more dangerous they become in a recession.[14] The Government must look at translating policies aimed at containing systemic risk from the financial sector to non-financial firms.


5.3 Risk must be shared, not borne by the government. SMEs facing a market failure are those that would be offered credit if lenders were fully rational. To ensure that public funds are not misused, private parties should be willing to share a substantial amount of risk before the government can offer assistance.


5.4 The finance supply chain is not broken. Lenders are still better positioned to assess the creditworthiness of SMEs than the government. All government support to SMEs needs to be channelled through the existing credit supply chain. The government does not need to micro-manage lending to SMEs, but rather underwrite pooled risks, letting the private sector identify, assess and manage the risks in question.


5.5 Cost-effective delivery is crucial. As support to SMEs will be financed by government debt,[15] it needs to be as cost-effective as possible so that the recovery of the sector is not jeopardised by high taxes in the future.[16] Additionally, action addressing the supply of credit require wide take-up in order to have any effect. Given the poor penetration rates of government support[17], distribution will fail unless it utilises existing networks of lenders, intermediaries, business organisations and supply chains.


5.6 The demand for financial skills must be met. Businesses with better financial skills are able to access more, and more diverse, funding. Yet one a quarter of all owner-managers are aware of programmes to help them develop their understanding of finance.[18] Though demand for most types of skills has fallen, this is an area where it is strong - and unmet.


6.0 Financing SMEs in the recession: Proposals


6.1 Small Firms Loan Guarantee (SFLG). The Government needs to decisively review the size and scope of the SFLG while the UK is in recession. The Scheme should be actively marketed and widened to include smaller, shorter-term debts in order to guarantee access to working capital for firms of all ages. Government should waive its 2% premium, as well as security requirements for partnerships and sole traders. Finally, lenders should be allowed discretion on the level of guarantee extended to individual loans, subject to an overall level of 75% across their portfolio.


6.2 Risk reinsurance guarantees. A tightening supply of credit insurance can interfere with the factoring of commercial debt and the supply of credit from suppliers to customers. Though limited competition among credit insurers may contribute to the problem, a lack of reinsurance for credit risk lies at its heart. By offering reinsurers a partial guarantee for losses, government could significantly improve conditions in this market.


6.3 Supply chain recapitalisation and supplier bail-outs. Subject to agreement on a sector basis, the government can encourage creditworthy large firms to recapitalise their supply chains, obtaining stakes in small suppliers and other partners in return for injections of working capital. Government support could range from loan guarantees to matched equity investment or incentives through lower rates of capital gains tax.


6.4 Business banking code of conduct. It is clear that the current code of conduct for business banking has failed to inspire SMEs' confidence in the UK banking sector. A new code of conduct for small business banking, with statutory standing, should commit signatories to giving adequate notice of changes to their terms of service, discouraging late payment and providing better access to independent financial advice.


6.5 Investing in recession-proofing skills. Demand for labour and, indeed, skills will inevitably fall during a recession. The UK's sizeable skills budget should now be redirected towards those areas where demand is still strong. Recent initiatives to free up funding for higher-level and modular training for smaller businesses should be extended to financial literacy and credit management training, and address the smallest and most vulnerable enterprises.


6.6. Supporting local enterprise networks. To engage small business owners within their peer groups, support and mentoring networks embedded in the local enterprise community must be recruited to the cause of improving access to credit. Entrepreneurs themselves can act as trusted, unbiased mentors to SME owner-managers and Regional development agencies (RDAs) can show strategic leadership by supporting more high quality, sustainable local mentoring services.


19 December 2008

[1] BBA, 'Support for small business - 3nd quarter of 2008' November 2008.

[2] Smith, L. and Keter. V (eds) 'Small Business, Insolvency and Redundancy' Commons Library, Nov. 2008

[3] Bank of England, 'Sectoral breakdown of aggregate M4 and M4 lending.' October 2008

[4] BBA, 'Support for small business - 2nd quarter of 2008' September 2008. No sector data exist for Q3.

[5] BBA, 'Support for small business - 3nd quarter of 2008' November 2008.

[6] Bank of England, Credit Conditions Survey Q3 2008.

[7] Ibid. and Bank of England Inflation Report Q3 2008.

[8] One banking expert has suggested that banks' default risk models are only applicable to about 10% of the stock of businesses.

[9] The BERR 2007 UK Survey of SME Finances found that three quarters of all SMEs bank with one of the big four high street banks. Only 12% of SMEs engaged with any lender apart from their main bank in the year to Autumn 2007. Of the rest, 81% didn't even consider doing so.

[10] BBA, 'The Business Banking Code', March 2008

[11] FPB and Graydon UK, 'Financial advice and smaller businesses' November 2008.

[12] FPB and Graydon UK, 'Financial advice and smaller businesses' November 2008.

[13] See for instance UEAPME (European Association of Craft, Small and Medium-sized Enterprises) Newsflash 36/2008

[14] Deloitte, 'Supply chain's last straw: A vicious cycle of risk.' June 2007.

[15] HM Treasury, Pre-Budget Report November 2008

[16] The start-up cycle should begin to recover in 2011. ACCA, 'Financing SMEs in the recession' Nov 2008

[17] IFF Research, 'The Annual Survey of Small Businesses' Opinions 2006/07' BERR, February 2008

[18] Cosh A., Hughes A., Bullock A. and Milner I., 'Financing UK small and medium-sized enterprises - The 2007 Survey' University of Cambridge Centre for Business Research, August 2008.