Last updated: February 9, 2011 8:23 pm

Cost of credit is key say SMEs

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Vince Cable, business secretary, proclaimed that the banks’ promise of £10bn in extra small business lending this year was “a good step forward”, but Britain’s entrepreneurs and Labour took a more sceptical view.

Small business owners say the high prices charged for credit and the bureaucracy involved are the principal reasons they are not borrowing more – rather than a lack of offers.

A survey of members by the Federation of Small Businesses found that 84 per cent had not asked their bank for credit, either because they had already been refused or because it was too expensive.

John Walker, FSB national chairman, said many small businesses had lost faith in the banking sector and were looking at other means of funding, such as asset-based finance.

“To achieve robust economic recovery, the smallest firms and start-ups need to have access to finance, but today’s [Project Merlin] commitments, as with previous lending targets, are unenforceable,” he said.

Relationships between business and banks came under tremendous strain during the recession and too little had been done since to repair the damage, according to David Frost, director-general of the British Chambers of Commerce.

“Without clear lending processes and more sensible decision-making at a local level, many businesses will still be reluctant to ask for loans and big net lending targets won’t be met,” he said.

Alastair Stewart, managing director of Etc Venues, which runs training and conference facilities in Birmingham and London, said he would only start borrowing from the banks once they reduced their interest rate margins.

“Many of us are just not prepared to pay interest rates and arrangement fees on new loans at between 4 per cent to 5 per cent over Libor,” he said, referring to the interbank lending rate.

Duncan Cheatle, who runs the Supper Club, a networking group for entrepreneurs keen to see their companies grow faster, said demand for loans would only increase if the terms being offered by the banks were made more attractive.

“The cost of lending was probably a bit too cheap before the banking crisis, but it has now gone too far the other way,” he said.

Business owners had been frustrated by the speed of bank decision-making on loans, Mr Cheatle added. “There are lots of people who have waited a long time for a decision, only to find that their application has fallen at the last hurdle.”

The idea of banks taking an equity stake in their company through the Business Growth Fund is seen as unnecessary by many owner-managers, who note that venture capital firms can already provide more than enough equity finance.

Michael Davidson, managing director of Brookvex, which provides managed services for infrastructure projects, said: “I would question how much value a bank could bring to your business other than cash.

“You may be giving up as much equity as you would with a VC firm, but not have the support of an experienced person joining your board.”

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