Memorandum submitted by the British Bankers Association


This submission outlines the UK banking industry's support for SMEs during the current economic crisis. BBA defines an SME as a business with an annual turnover of under 1 million.


1. There are nine major UK high street banks that provide lending facilities to SMEs:

Lloyds TSB


Royal Bank of Scotland



Alliance and Leicester

National Australia Bank Group (Yorkshire Bank and Clydesdale Bank)


Co-operative Bank

2. There are approximately 4.7 million SMEs in the UK employing a total of 13.5 million people and generating more than 50 per cent of UK turnover[1].

Regulation of SME banking

3. Banks' dealings with small business customers are regulated via the BBA/APACS Business Banking Code. The Code is independently monitored by the Banking Code Standards Board (BCSB) and includes commitments to treat customers fairly and deal sympathetically and positively with cases of financial difficulty.

4. The Business Banking Code[2] also contains requirements about bank practices involving current accounts; deposit accounts; loans and overdrafts; charges and interest rates; and how banks will assist small businesses in financial difficulty.

5. The Code is independently reviewed every three years and all key stakeholders, including government and SME representative groups are invited to suggest additions and amendments.

6. Subscribers to the Code also follow the BBA Statement of Principles which sets out how banks and SMEs should work together from the outset of their relationship through the life of the small business, including if the business should find itself in financial difficulty. A copy of the Statement is given to all new small business customers and available free at any time on request.

7. The Statement is currently being revised in light of the current economic circumstances and BBA is working with BERR to consider input from members of the Small Business Finance Forum. (Further information follows in the Current Initiatives section below).

BBA Small Business Statistics

8. BBA has collected data since the early 1990's on bank support for small businesses (defined as those - some 3.7 million - other than charities, clubs or societies, with total payments from their bank accounts of less than 1 million annually). Around one-third of small businesses are borrowing either through loans or overdrafts and, although changes in organisational structures within individual banks and minor coverage changes have caused some breaks in series, general trends in lending can be seen below:

9. The graph illustrates the long term structural change from overdrafts to loans as the main means of debt support for small businesses. As overdrafts are really only suitable for short term working capital needs, this change in structure provides a more sound footing than was existent in the recession of the early 1990's.

10. At the end of the third quarter, total lending to small businesses was growing at an annual rate of 10 per cent. The net increase in lending of nearly 1 billion in the quarter was only marginally lower than in the previous quarter and the same quarter of 2007:


2007 Q1

2007 Q2

2007 Q3

2007 Q4

2008 Q1

2008 Q2

2008 Q3










11. Whilst lending to small businesses totals some 54 billion (average loan is around 80,000, average overdraft is around 12,000), deposits from small businesses stand at 55 billion. Annual growth in deposits has slowed to only 3 per cent from 18 per cent at the beginning of 2007, as small businesses increasingly fund their activities out of cashflow, rather than increasing their borrowings in the face of difficult trading conditions and the economic downturn.

12. Banks continue to support small businesses (perhaps by offering cash management facilities and payment services, rather than finance) and more than 0.5 million new small business relationships were established with banks over the last year.

Current Outlook

13. As responsible lenders, banks must ensure that applications for lending are subject to appropriate risk and credit assessment techniques. Banks will want to see that SMEs ensure their business plans, cashflow forecasts etc are reviewed and still realistic in light of the current economic uncertainty.

14. Government believes that the banking industry should make more credit available to SMEs and this places pressure on banks to relax their approach to responsible lending. To do so would be harmful in the long term as businesses that are not viable become overextended, with knock-on effects on businesses that trade with them.

15. There is a perception that reductions in base rate should make lending to SMEs cheaper. This is not the case as the short-term LIBOR rate remains significantly higher than base and longer maturing funding is higher still.

16. An additional pressure is the government's increased requirement in the amount of capital that banks are required to hold against their lending. This capital is expensive and as the economy deteriorates more capital is required to offset the higher risk of the lending.

17. A major impact on SME cashflows is the increasing extension of debtor days among traders i.e. the gap between receiving and paying an invoice. Late payment is common and becoming more acute in current conditions. The average period is now over 60 days (twice the period allowed for under UK legislation).

18. Contrary to the evidence provided by the BBA's statistics, many commentators are claiming that banks will not lend to small businesses. These claims are undermining small business confidence and discourage customers from approaching their banks to ask for help at an early stage.

Financial reporting cycle

19. BBA has been in discussions with the Financial Reporting Council; Audit Practices Board; Institute of Chartered Accountants for England and Wales; and the CBI to discuss concerns that companies may find it difficult to get confirmation of the availability of future finance, for inclusion in end of year accounts i.e. classification of the business as a going concern.

20. Members confirmed that they are seldom approached by small businesses seeking confirmation of facilities during the annual reporting cycle. Banks do not anticipate an increase in such approaches during the 2008 cycle.

21. Our members do not believe that a form of words or 'negative assurance' on the continuing availability of finance is appropriate. Primarily, such an initiative could have the unintended consequence of banks' determining that facilities are to be reviewed on a more frequent basis to ensure that a statement of 'negative assurance' is still valid. This would incur costs for the small business and the use of time and resources to provide more frequent information. Additionally, our members do not believe that such assurances could be given without risking that a bank becomes legally liable for any change in circumstances over the period.

22. Members believe that the 1994 guidance developed by the APB is still fit for purpose. It provides useful information on how directors should consider their status as a 'going concern' and members have agreed to contact the APB if they consider that there is scope for additional clarity in the document.

Current Initiatives

23. As outlined above, BBA's members are continuing to make finance available to SME's at the same level as 2007, as per their commitment to the government.

24. Through participation in BERR's Small Business Finance Forum, BBA and its members have also acted to:

(i) provide a single dedicated central phone number at each bank for SMEs to contact if they are not happy with their branch's actions

(ii) collect the BBA's SME lending statistics on a monthly basis, rather than just quarterly

(iii) work with key stakeholders to revise the BBA Statement of Principles to be monitorable by the BCSB and to more clearly outline banks' responsibilities during times of financial difficulty

(iv) work with the Bank of England to collect fortnightly SME lending data.

25. The BBA has also created a dedicated page on its website to house information and advice for small businesses[3]. This includes:

(i) the BBA/Moneyfacts Business Account Finder, which helps SMEs to compare and select from over 50 types of business current account (this had 3,661 visits in November 2008).

(ii) links to BERR's guidance to SMEs on managing cashflows

(iii) top tips to SMEs on how to improve the viability of their business

(iv) copies of all the BBA's free SME leaflets

(v) copies of the Business Banking Code and Guidance.


December 2008







[1] Figures provided by the Federation of Small businesses

[2] Copies of the Business Banking Code are available free in all bank branches and at

[3] The Small Business page of the BBA website can be found at