Memorandum submitted by the Forum of Private Business
What is the FPB?
The Forum of
Private Business (FPB) was formed in 1977. We are a business support
organisation that fights for the fair treatment of smaller businesses by
decision-makers and support the profitable growth of our members. The FPB
represents 25,000 UK-based businesses, which employ in excess of 600,000
people. We are active in
The FPB provides a range of business services aimed at increasing member efficiency and profitability.
All of the FPB's campaigns are based on the views of our members. We talk to our members in various ways, via surveys, by telephone and face-to-face contact. We also collect data electronically, which enables us to source opinions from hundreds of businesses within a matter of hours.
The FPB works to bring businesses together with their own elected representatives. Members vote in a quarterly Referendum, adding comments for us to send to their MPs, MEPs, MSPs and AMs. Referendum is a tool that business owners have been using since 1977 to make their voices heard.
The FPB strongly believes that there is room for improvement in the provision and effectiveness of financial support for small-to-medium enterprises (SMEs.)
Three issues are having an impact on the quality of financial services available for smaller businesses and ultimately, on the strength of the British economy.
First, fewer and fewer lenders have a relationship with their customers that goes beyond the algorithms and balance sheets of the company.
Second, personal guarantees on business loans are being required as security when further business assets may prove less risky.
Third, the Government and lenders must acknowledge that financial advice must come from those sources trusted and relied upon by smaller businesses.
The FPB recognises that certain banks are already making commercial lending and support for small businesses a priority. Equally, there are some banks for whom SMEs do not figure as highly. We suggest that small businesses should be able to expect a similar standard of service regardless of where they bank, seek lending or go for financial advice.
The quality and accessibility of financial assistance available through the Government, banks and trade bodies must improve as they continue to support small businesses in the challenges of the current economic climate.
Financial Support for Smaller Businesses
A great deal has been said about the availability of credit for small business. The FPB acknowledges that banks are businesses and must run as such. However, the financial support available to small businesses is not limited to the lending available. The relationship with banks, securitisation of loans, and the provision of financial information can be just as important to the survival of the business.
The key factor which we believe does the most damage to financial support for small businesses is the decline of strong working relationships between the banks and their customers. Decisions about finance and lending need to be made with a more accurate assessment of the business's risk profile than is readily available from its balance sheet. Now, more than ever, banks should be attempting to understand the models and assumptions behind their small business customers.
The second point focuses on the securitisation of loans and the use of personal guarantees for businesses assets. The FPB believes that lenders should not seek personal guarantees from small business owners until all business assets have been reviewed. The banks' propensity to take personal guarantees does not accurately reflect the potential damage of defaulting on a loan secured in that way.
Thirdly, the financial advice taken by small businesses must be targeted and accessible. Businesses should feel comfortable approaching any and all of their standard sources for financial support information. FPB research shows that accountants, bank managers and financial specialists account for the largest percentage of financial advice. Governments and banks should take advantage of the access provided by agents and trade associations to ensure that information on lending and financial options reaches the businesses who need it most.
This document lays out the findings of two pieces of research carried out by the FPB in October and November 2008. One is a panel of members polled on a bi-weekly basis to gauge the state of the economic downturn. The second is a piece of joint research with the FPB and Graydon Credit Management which examines where small businesses get their financial advice and the quality of the advice provided.
Are small businesses being impacted by the recession?
In November 2008, the FPB set up an panel of 100 members with the intention of polling those businesses every two weeks to more accurately test the breadth and depth of the economic downturn. The members' businesses have an overall turnover of £193 million and borrowing of just over £61 million. The median turnover of businesses in the panel is £550,000 indicating that these are established employers. Last year 62% made a profit and 23% made a loss.
In the first survey of members, our panel reported that banks are requiring additional security for loans; 37% have obtained borrowing using the security of their own homes, 20% the business premises and 20% the debtor book. This highlights the reliance on personal guarantees by the banks, and the increasing desperation of small business owners who are prepared to shore up their life's work at the risk of their home.
The early indicators from the most recent set of results show that the panel feels that the support provided by Government and the banks has deteriorated over the last two weeks by 30 and 48% respectively. The panel's response indicates that the top issues for small businesses currently are 'Lack of Orders' and 'Business Confidence,' with 'Banks' Volatility/Lack of Financial Support' coming in third.
Access to finance
Access to finance has deteriorated, but respondents mentioned that this was not simply rejection of finance but included additional banking fees and arrangement charges as well as their own ability to pay.
Importance of lending
The perception amongst the panel members is that overdraft facilities are more important to their business than term loans as they are looking to retrench their business. This makes the loss of overdraft facilities amongst business so much more harmful, particularly for those businesses which have not utilised an overdraft in the boom of the last ten years.
Terms and conditions of loans
Few of the terms and conditions of the loans have become more stringient over the last month but the lending rate has not shown a significant change. Arrangement fees have gone up for some businesses, however others have reported drops in the overall amount that they have had to pay.
Change to average lending rate
Base rate figure has not changed in the period between questionnaires (3%).
A similar proportion have seen a tightening of the terms and conditions associated with overdrafts, but there has not been the same level of improvement.
Terms and conditions of overdraft
A number of businesses reported that the interest rate on their overdraft is to go up from 2.9% to 4.25% in January which explains why the lending rate has only increased slightly in this survey.
Change to average lending rate
Additional security required
As the research
indicates, the last two
Where do small businesses turn for financial support?
In October 2008, Graydon
Quality of advice from bank managers varied considerably. Some respondents were very happy with the advice provided by their bank managers, but there was concern about the high turnover of advisers, the fact that advisers were effectively the best salespeople in the branch and that some were not even old enough to remember the last recession.
Although the majority of respondents stated that they only sought advice on financial matters when they felt that they needed it, anecdotal evidence suggests that, when an organisation is proactive in providing financial advice, it is greatly appreciated by business-owners. One respondent said he wished he had been contacted last year by an adviser from the bank as the support he received recently was so useful.
Key gaps in the provision of financial advice were identified by the very smallest employers (those with fewer than five staff) and those who only sought financial advice from banks, rather than a combination of advisers.
Businesses reporting the highest levels of satisfaction with financial advice were those who had sought advice on a more frequent basis. Those who rarely received financial advice indicated that the advice they had received had been unsatisfactory.
Who small and medium-sized businesses consult for financial advice
72% of owners of small and medium-sized businesses said that would consult their accountants for financial advice, 48% their bank managers and 36% financial specialists.
Owners of firms considered to be most endangered by the current financial situation, such as those in retail and construction, were more likely to consult their bank managers for advice, indicating that industries which are perceived as risky are having to check with banks to see if they are credit-worthy. Respondents were not given the option of 'would not seek support'; however, 15 business-owners stated that they would not seek financial advice as their finances did not warrant it.
Businesses with more than 50 employees were more likely to seek support regularly, whilst those in business for more than 10 years were least likely to look for advice more regularly than just on an annual basis.
Reasons respondents do not consult accountants or bank managers more frequently
Just over one in three respondents claimed not to consult their accountants or bank managers more regularly than once a year. A higher proportion of businesses did not answer this question. Many of these claimed to only receive financial advice when their accounts were being drawn up, suggesting that this was perceived as being regular support for their businesses rather than professional financial advice.
Respondents generally felt that they did not need support on financial matters. This was particularly true of business-owners who had survived the last recession, who had a perception that the potential advisers had not.
Availability of advice was not directly an issue, but some respondents did mention that the high turnover of advisers meant that advice was not as accessible as it could have been.
Time was more of a key issue for construction companies, whose owners were typically on-site during normal office hours. It was also cited as an issue for recently established businesses, whose owners had not got into a routine of accessing financial advice.
The other reasons cited were that respondents themselves were experts; that they used other experts, such as financial planners; that their banks did not come to them to offer support; that there was no proof of the quality of advice; and that the advice they received was on an informal basis only.
Matters on which respondents usually seek professional financial advice
* Option not provided, but were frequent answers in the 'other' category
50% of respondents sought external professional financial advice for business planning, to ensure that the financial stability was there for their businesses.
Financial products, such as overdrafts and commercial loans, were
the next most cited reasons for small business owners seeking financial advice.
According to a recent Banking Industry Group report, commissioned by the
Department for Business,
One in ten specified compliance with VAT, PAYE and other regulatory issues, even though this was not offered as an option. This could be construed as being part of business planning, but the need for businesses to cite it separately illustrates the increasing burden of regulation on smaller firms.
Rating of the quality of financial advice received by small business owners
73% of owners surveyed felt that the financial advice that they received was good or very good, with just 14% stating that it was poor or very poor. 13% of respondents stated that they did not know about the quality of financial advice as they had not received any recently.
Using a scoring system of +2 for very good, +1 for good, -1 for poor and -2 for very poor, it is possible to analyse the satisfaction with financial advice on a variety of criteria. This is shown in the chart below, where the mean score was 0.77. A score of 1 implies that the financial advice was good, whilst 0 means that the advice was neither good nor poor.
Mean score for the quality of financial advice
There were no significant variances in the perception of quality of financial advice from businesses in different sectors.
The smallest businesses surveyed, as well as those with more than 50 employees, were most likely to rate financial advice received as being below the overall average. Owners of established businesses were less likely to score the advice that they received highly, particularly those who had survived the last recession. The more regularly advice was sought, the more highly it was rated.
Those who received advice from their accountants only rated the quality of advice higher than those who received advice from bank managers only, or a combination of bank managers and accountants. This indicates that the advice received from bank managers was rated lower than the advice from accountants.
Advice from bank managers was rated as relatively poor; however, this may be due to the recent negative media stories or the quality of the products they currently provide.
Bank managers were more likely than other professional advisers to approach small and medium-sized business owners to offer advice. Some businesses praised this proactive approach, but for other business owners this illustrated their orientation towards sales rather than advice.
Firms in high risk sectors (businesses under 3 years old, retail, hotels and restaurants, construction) were also more likely to seek advice more regularly. In a small number of cases, this was due to the conditions of invoice financing or factoring.
Usage of financial advice in last 12 months and anticipated usage in next 6 months
SMEs anticipate more financial advice will be required in the next 12 months compared to the last 12 months, indicating that they are expecting market conditions to get worse, if anything. Those who used other advisers such as the FPB or other membership organisations or business link were the most likely to have received additional support in the last 12 months and are most likely to increase the amount of support they receive in the next 12 months.
Current and predicted frequency of usage of financial advice
Small and medium-sized businesses fall into two groups; those who have received support more than two or three times a year and those who receive support less frequently. Businesses in the former category have received more support in the last 12 months than they would usually and this trend is expected to continue over the next year. So that small businesses receive the most accurate and relevant financial support, the Government and banks should ensure that all possible routes are covered in the provision of financial information.
There is clearly a growing need for financial support for small and medium-sized businesses. As these businesses begin to feel the effects of the recession more clearly, the provision of sound financial advice, as well as the cost and availability of credit, may mean the difference between survival and insolvency.
8 December 2008
 With 45% of the members reporting.
 Figures quoted are: Improvement - Deterioration