Mainstream lenders’ appetite to lend doesn’t look likely to improve, argues Steven Nicholas, CEO at Tiuta plc
Looking at the major banks in the UK and understanding their priorities can be a somewhat baffling exercise at present. In a market in which businesses are crying out for funding the Banks recently announced they would be introducing a ‘mentoring’ scheme for SMEs which is designed to help the firms with issues such as finance, marketing and HR.
Now, this is all well and good, and anything that helps businesses grow closer relationships with the banks can only be a good thing. However, are we not missing the crux of the matter here overlooking the fact that this mentoring scheme will also cost money to set-up and implement. Money perhaps which might be better used in actual funding lines?
The point of the matter is that the banks continue to operate in something of a parallel universe in which the needs of SMEs are secondary to their need to use low-cost funding to repair their balance sheets rather than actually lending it. The proof of the pudding is in the eating – consider these figures:
In the first quarter of 2011, the top five banks officially lent £16.8 billion to SMEs. Their commitment to ‘Project Merlin’ is supposed to be £76 billion throughout the year, which would equate to £19 billion a quarter. Clearly, they are already someway off the pace although recent comments seem to suggest that the targets have now been downgraded to the £17 billion market per quarter. Another massaging of the figures it would seem in order to make it look like progress is being achieved.
Secondly, figures from the Federation of Small Businesses (FSB) show that one in five of Britain’s small firms approached one of the banks for credit in the last 12 months. Of that number a staggering 320,000 were refused.
It is perhaps little wonder that firms of all kinds, entrepreneurs, developers, in fact anyone who wants to fund any kind of business venture, are turning to the short-term finance sector in order to secure funding. In our opinion, there has been a considerable dereliction of duty by the major banking players in the UK, and even with their rather pitiful commitments to Project Merlin, we are still a long way from a healthy, functioning lending market which meets the needs of businesses.
We deal with customers all the time who are deemed ineligible for mainstream funding and, yet, when we consider the deal and its merits, we can clearly see the benefits for all. With our own funding lines we can help these individuals and businesses, and there is considerable ongoing demand for our products, however in a number of cases it should really be a mainstream lender offering the finance and yet there is no appetite for risk and this is impacting greatly on the ability of UK plc to deliver any kind of growth.
I recently met with a representative from a leading UK bank and we discussed a number of potential deals which were currently on the table. The message was clear, at all kinds of levels, with different risk profiles, there was no appetite but plenty of different ways of saying no. We were not expecting the bank to provide all the funds but even a partial arrangement was not available indeed, this is one of the major issues, the banks are not even willing to work with lenders like ourselves in order that we may utilise their lower-cost funds and offer the customer access to these finances.
With this opportunity we would be able to lend and help more businesses simply because lower-cost funding means we can take a slightly more flexible view on potential cases. Deals which may have fallen into the margins in terms of our ability to fund them would become do-able and the overall impact would be considerable for all concerned. After all, we are talking about businesses which use the funding, for example, property development which will employ builders and craftsman we are talking about potentially creating employment and those individuals would pay tax, and the cycle continues thus. Effectively, this funding would make a considerable difference not just at an individual firm level but across the whole economy.
Unfortunately, we are at a plateau and not a very high one at that, which means that mainstream lending levels look likely to remain low for the foreseeable future. In this situation, demand for short-term finance will grow – and clearly this is a good thing for the sector – unfortunately our cost of funding is higher and therefore the end customer will be paying higher rates. However, when the alternative is that the deal does not go ahead then we believe most customers will see the value in the finance because it gets them to the position where they want to be.
Action is what we want to see, and there should also be a commitment from banks to work together with lenders like ourselves we see exactly the problems and shortcomings of the current system are having at the coal-face and the implications of not financing the UK’s companies is a further, extended period of stagnation. Who in their right mind would want that?
