Written evidence from the Forum of Private
Business
INTRODUCTION
This is a collection of research undertaken
by the Forum of Private business to be presented to the inquiry
on Government Assistance to Industry . We represent 20,000
small businesses throughout the UK. We have decided to concentrate
on the key areas which affect our members. The evidence that we
are presenting relates to the following points;
— the role of the government in encouraging
the supply of credit to small and medium-sized enterprises,
— the relationship between government,
industry and the banks,
— the role and performance of the Small
Business Banking Forum,
— steps to encourage inward investment
into the UK, and
— government policy as set out in the green
paper on business finance.
THE SUPPLY
OF CREDIT;
THE ROLE
OF BANKS,
GOVERNMENT AND
INDUSTRY
During the recession
At the start of the Credit Crunch we set up
an Economic Downturn Panel to report on economic conditions and
their effects on small businesses. During the recession our members
felt that the previous Government did not do enough to support
their businesses. As the table below shows, business owners felt
government support for small businesses was deteriorating.
Table 1.1
| Dec | Jan
| Feb | March |
April | May | Sept
|
| Market for products/services | -64%
| -38% | -54% | -12%
| +2% | -8% | +14%
|
| Competition within the market | -14%
| -18% | -9% | -15%
| -19% | +3% | -22%
|
| Viability of your business | -38%
| -20% | -34% | -16%
| -12% | +13% | +6%
|
| Cost of complying with regulations | -41%
| -30% | -38% | -28%
| -37% | -34% | -25%
|
| Late payment | -61% | -68%
| -61% | -34% | -56%
| -57% | -39% |
| Risk management undertaken by financial services organisations
| -51% | -41% | -3%
| -47% | -21% | -15%
| -17% |
| Government support for small firms | -30%
| -6% | -21% | -30%
| -20% | -24% | -22%
|
| Bank support for small firms | -45%
| -22% | -48% | -50%
| -37% | -6% | -18%
|
| Accuracy of media coverage | n/a
| n/a | -40% | -31%
| -18% | -16% | -9%
|
(Economic Downturn Panel, September 2009.)
| | | |
| | | |
During this period bank charges increased, as table 1.2 shows.
Table 1.2 changes to banking fees
CHANGES TO BANKING FEES OVER THE LAST MONTH WERE AS FOLLOWS
| December | January
| February | March
| April | May |
September |
| Increased | 27% | 5%
| 15% | 24% | 20%
| 15% | 12% |
| Decreased | 2% | 11%
| 2% | 3% | 3% |
6% | 6% |
| Stayed the same | 72% | 84%
| 83% | 74% | 78%
| 79% | 82% |
| Net balance | +24% | -6%
| +13% | +21% | +18%
| +9% | +6% |
(Economic Downturn Panel, September 2009.)
| | | |
| | | |
Businesses did not have a great deal of confidence in the
role of banks in stimulating growth.
This was reflected in the fact that only 5% of the SMEs believed
improved bank support would be a factor which would help their
businesses to grow.
In total, 40% of those looking for credit (almost a quarter
of the sample) in 2009 were unsuccessful in accessing one or more
types of finance. Access, in terms of traditional commercial finance
from banks (loans and finance), was particularly low, with 52%
being refused for business loans and 38% being refused an extension
or additional overdraft facility.
The most recent research on this subject, the latest BIS
SME Business Barometer(2), puts the success rates for all types
of finance at 42%, overall the comparative figure from the Economic
Downturn Panel research is 40%.
Figure 1 highlights the policies, as of 2009, that businesses
believed would be important in helping their business grow.
Figure 1
(Referendum 186.)
This highlights that businesses were optimistic that many
of the 2009 measures would help their business and the wider economy.
During the recovery
Since the economy has begun to recover, members feel that
that the banks continue to be risk adverse and are not providing
enough credit to allow business to make the most of the improved
conditions.
We set up an panel of over 350 member small businesses in
January 2010 called Economy Watch in order to measure the
recovery. In comparison with the Economic Downturn Panel, there
is relatively little movement in terms of the cost and access
to finance, with 92% of businesses encountering no change in the
cost of finance and 80% not seeing any change in access to finance.
In March 2010 our Economy Watch panel found that business
needed around 18% of additional funding from banks or other external
forces in order to meet their plans for 2010. However, the evidence
suggests that businesses were not receiving this extra funding
(see table 2). Businesses were looking to invest, but were relying
on their own cash reserves rather than external finance.
Table 2
ACCESS TO fINANCE
| March 2010 | April 2010
| May 2010 |
| Improved | 6% |
3% | 3% |
| Deteriorated | 13% | 13%
| 4% |
| No change | 63% | 66%
| 75% |
| Not relevant | 18% | 15%
| 16% |
| (May 2010 Economy Watch panel.) |
| | |
| |
| |
In comparison with the Economic Downturn Panel there is relatively
little movement in terms of the cost and access to finance, with
92% of businesses encountering no change in the cost of finance
and 80% not seeing any change in access to finance.
One small business, which manufactures and supplies electrical
industrial equipment, was not receiving the support it needed
to meet a large contract. The business owner said "We have
an order of some $56 million supported by a letter of credit for
$25 million already in place and no support whatsoever from the
UK Government Support network or banks| if, as a small business,
we do not get the support against finances already secured than
the worst cases will be that yet another business will have no
choice but to fold with the loss of some 40 jobs rather than creating
the 40 or so jobs we envisaged, coupled with other similar local
companies who would be heavily involved with us in achieving this
contract and if we fail we would impact on them as well."
One key concern for business was the lack of information
about available government schemes. 31% of respondents to our
quarterly survey, Referendum 189, would like to know more about
how to influence their credit score and a slightly larger proportion
are concerned about the increasing onus on businesses to illustrate
that they are creditworthy in the current lending climate. At
least 18% are unsure of the easy availability of each type of
advice and guidance for their business. In most cases this is
because the owner or manager has not had time to look or does
not know where to look. Comments from business owners indicate
that some are reluctant to use Business Link to signpost them
to the correct provider due to previous bad experiences.
When listing the reasons why support is not easily available,
some of our members said; "There is support out there but
confusion exists over quality and delivery" and "It's
hard to find where and when to get it; nobody seems to know if
support is available". This information must be made more
available in order that SMEs can make informed decisions.
The chart below shows that banks dominate when it comes to
lending.
Figure 2
COMPARISON BETWEEN PROBABLE PROVIDERS OF FINANCE IN 2010
(Finance and Credit Management report)
The lack of any real alternative to finance from banks (whether
it be traditional forms of bank lending or alternative forms of
finance such as invoice discounting) is a major concern for our
members, as any growth finance will need to come from the same
companies that cut or refused credit, increased banking charges
and who are blamed for encouraging the culture of overreliance
on debt finance in the past. Many businesses are now chastened
from the experience of the last few years and many of our members
are reliant on the greater usage of internal profits as a growth
strategy, if they expect to grow at all. For this reason there
is a real chance that any recovery will be a jobless one, as around
two thirds of jobs created between 1997 and 2008 were in SMEs.
Tougher regulation on banks would be popular amongst our members;
however more important longer term are steps to improve communication
between banks and business owners, especially through greater
transparency. We are concerned that tougher regulations would
invariably lead to increased cost of or reduced access to finance
at a time when our members are in greater need of reasonable access
to affordable finance.
A stable business environment has become an increasing priority
for business owners, probably due to the instability of the European
economy and fears of a double dip recession.
In addition, there needs to be an improvement in public sector
organisations when it comes to late payment. Businesses said these
groups delayed payment in March to the end of the financial year,
which was a concern.
ENTERPRISE FINANCE
GUARANTEE SCHEME
In our response to the green paper on finance, we outlined
that there are some problems with the Enterprise Finance Guarantee
Scheme (EFG). Our research has found that businesses had struggled
to access EFG funding.
One Bradford-based business owner, who runs a photography
and videography service, has tried so far unsuccessfully to gain
EFG funding. He said that the funding which was available was
unclear; "I have tried approaching Lloyds TSB for an enterprise
finance scheme loan, waited 5 months for a reply... and still
no reply affirmative, or negative, just no reply. One consultant
whispered the name Enterprise Finance Scheme at HSBC, as if, shhhh!
we are not supposed to tell you we can take part in this scheme
the government is funding. Why is this failing? Why are the bankers
failing me, and others?"
The Enterprise Finance Guarantee scheme had initial teething
problems due to poor communication and a very short timeframe
in rolling it out to the nation's businesses. There are however
two main issues outstanding, one is that there is still no information
about how many businesses asked for the scheme but were discouraged
from accessing it and the other is simply the cost of the scheme.
At some stage the EFG needs to be scaled back to levels closer
to the Small Firms Loan Guarantee scheme; in the meantime we would
like to see the scheme assessed annually and greater flexibility
in how businesses can access the scheme. Ultimately we would like
to see the private sector take on much of this itself, perhaps
operating a two-tier system where the second tier was more intensive
support for the business but at a greater cost—part of the
vitriol aimed at bank charges was that our members felt that they
were having to pay for the mistakes that the banks themselves
had made and were getting nothing in return.
We feel that the Government could make some of its schemes
such as EFG more flexible in the short term, but in the longer
term it should look to roll them back as the economy improves.
We feel that the financial industry could benefit from more intensive
support but at a slightly higher cost. Extending the scheme to
allow the EFG to support growth finance through leasing or similar
could be one such option.
GOVERNMENT POLICY
AS SET
OUT IN
THE GREEN
PAPER ON
BUSINESS FINANCE
Historically, businesses need more finance during a recovery
than during the recession itself, therefore this green paper is
important as it raises issues that we have been concerned about
for some time. So far in 2010 there has been no increase in the
availability of finance for smaller firms, despite the economy
coming out of recession; in fact the reverse has been the case.
Some issues do need to be addressed as a priority; in particular
there should be clearer definition of what should be expected
from banks. In the last two years a number of our members have
accused a number of the banks of dragging their heels. We would
like the new Bank of England regulator to set specific timelines
for decisions to be made on lending, written feedback on a loan
rejection and the time for an internal escalation within the bank
to be made, rather than the current wording of the Lending Code
which uses phrases such as "appropriate" or "reasonable".
Generally, greater transparency is required to restore trust
in the banking industry as businesses have seen bank charges increase,
have had greater demands put on them to provide collateral for
lending, and have also seen hidden clauses activated on products
and little change to the cost of lending, despite the historical
reduction in the Bank of England's base rate. Along with a more
stable taxation and regulatory environment, this should allow
our members to plan more effectively for the future.
We would also like to see greater discretion locally, with
bank managers able to take into account other evidence from businesses
such as recent orders etc to help them access finance. In other
countries such as Germany the response to the crisis has been
a much closer relationship between banks and their customers,
with the manager telling their clients when not to borrow as well
as when to consider more complex financial products such as equity
lending. Due to the historical sales orientation of relationship
managers in this country this would take some time to implement
and a better option would be to incorporate local independent
expertise such as accountants or financial planners. Shared training
schemes whereby banks, accountants and business owners have the
option of understanding the basics of how banks assess risk would
also be helpful to improve communication at a more local level.
STEPS TO
ENCOURAGE INWARD
INVESTMENT INTO
THE UK
Recent research by the Forum indicated that businesses involved
in international trade were more likely to cite external finance
as an issue than businesses whose trade was only in the UK. In
total, 25% of importers and a similar proportion of exporters
saw access to finance as an issue for their business compared
to just 15% who traded solely in the UK.
Cash flow problems also disproportionately affected those
involved in international trade as payment terms in other countries
differ significantly from the UK. Our research indicated that
businesses of all sizes would like to see:
— Better protection for importers and exporters from
international credit ratings agencies. Businesses complain that
it is difficult to assess credit internationally and the information
available to them is not always recent enough to allow them to
make an informed decision.
— A greater range of financial products from financial
institutions that support international trade such as a greater
range of choice on international merchant services, web-based
foreign exchange products or products to effectively reduce the
risk of international trading.
— More effective advice and guidance on selling or buying
abroad through the retail banking system.
Trade finance was less of an issue as the current system
is workable, however there is a feeling that for our manufacturing
members who are looking to compete with firms in key rivals in
Germany, France and Holland that these countries do more to support
their businesses overseas than the UK does. More help from embassies
was seen as important from our recent research and there are indications
that this is starting to happen.
Performance of the small business banking forum
We were a member of this forum which was established by the
previous Government when small businesses began to experience
significant problems in accessing finance. We found the forum
useful for raising these issues at ministerial level and from
the point of view of speaking directly to the banks at one regular
forum. The small business banking forum had several achievements
and outcomes, one of which was the British Bankers Association's
(BBA's) updated Statement of Principles. The updated statement
lays down in black and white what small businesses can expect
from the banks and what they are expected to do in return. Although,
as stated above, we would like the new Bank of England regulator
to set specific timelines for decisions to be made on lending,
our members found this document useful in preparing for their
negotiations with the banks. Another outcome of the forum was
that some of the banks published their own customer charters,
aimed at clarifying the relationships the banks have with their
small business customers. Obviously the problems small firms have
experienced in accessing finance are complex and not easily solved,
however the forum was one way of facilitating a sharing of information
which benefitted both the banks and small businesses. The Government
played its role in bringing these two groups together and now
that it is no longer involved in this group, we hope that the
momentum continues and that the group continues to discuss emerging
issues, facilitated by the BBA.
Recommendations
— We feel that the Government could make some of its
schemes such as EFG more flexible in the short term.
— Information regarding government support must be made
more available to enable SMEs to make more informed decisions.
— Clearer definition of what should be expected from
banks is needed. We would like the new Bank of England regulator
to set specific timelines for decisions to be made on lending,
written feedback on loan rejection and the time for an internal
escalation within the bank to be made transparent.
— Generally greater transparency is needed to restore
trust in the banking industry.
— We would like to see greater discretion locally, with
bank managers able to take into account other evidence from businesses
such as recent orders etc to help them access finance.
— We hope that the momentum generated by the Small Business
Banking Forum continues and that the group continues to discuss
emerging issues, facilitated by the BBA.
The Forum hopes that the evidence collected on the previous
governments' role in stimulating finance to business has been
useful to the committee. We hope that the new government takes
this evidence on board and uses it to improve government and bank
support to SMEs.
Sources
1. Parry T and Skaljak G, Finance and Credit Management
http://www.fpb.org/images/PDFs/research/FPB-Graydon%20research%20report%20-%20Finance%20and%20credit%20management.pdf.
FPB/Graydon, January 2010.
2. Parry T, Referendum189 Preparing for Growth http://www.fpb.org/page/104/Referendum.htm,
FPB, November 2009.
3. Economy watch report May 2010 http://www.fpb.org/images/PDFs/surveys/Economy%20watch
%20May%20Report.pdf. FPB, May 2010.
4. Economic Downturn Panel September 2009 http://www.fpb.org/images/PDFs/research/FPB%20
Economic%20Downturn%20Panel%20Report%20-September.pdf. FPB, September
2009.
ABOUT THE
FORUM OF
PRIVATE BUSINESS
The Forum of Private Business is a proactive, not-for-profit
organisation, providing comprehensive support, protection and
reassurance to small businesses.
The organisation aims to deliver an exceptional service to
its members, adding value through the provision of practical,
tailored solutions that promote business success, and by being
their voice in government.
29 September 2010
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