submitted by the Mayor of London
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
a) evidence of the availability of credit in London for small and medium-sized
b) views of business representative
organisations in London;
c) perspective of the banks;
d) recommendations for Action.
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
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.
of the availability of credit in London
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
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
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 one per cent
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
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 eighteen
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
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.