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;

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 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 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 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 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