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Monday, July 16, 2012
The role of banks has come into even sharper focus with the Libor fixing scandal. Business writer Annabelle Dickson looks at a selection of the alternatives for businesses seeking finance.
Since the start of the banking crisis in 2008 the issue of business access to finance has never been far from the headlines. But with the latest Libor fixing and mis-selling scandals in the last few weeks, the role of the banking sector in society is even more under the spotlight as the government looks set to impose stringent regulation on the industry.
The extent to which the fixing of Libor – inter-bank lending rates – has affected businesses will not be known for some time, certainly not before other investigations into alleged Libor manipulation come to a conclusion.
But with the “Bollinger” revelations – FSA transcripts of where promises of champagne were given in thanks for lowering Libor submissions – and a separate ruling by the FSA about the mis-selling of a complicated interest rate swap product, which stung a host of smaller firms, including Watton businessman Paul Adcock, is the patience of firms still struggling to get finance from their banks running out?
The latest figures in February from the Bank of England under the Project Merlin deal – which saw the government set lending targets for the five main banks – showed that total net lending of the UK banks fell in all 2011’s quarters.
The figures also confirmed that the five banks – Barclays, HSBC, Lloyds Banking Group, RBS and Santander UK – had missed their lending target to small businesses.
Meanwhile, a survey of 11,000 firms by the Federation of Small Businesses (FSB) indicated that only one in 10 firms obtained a bank loan in 2011.
But while there is no suggestion that we can do away with the banks, there is increasing talk within the business community that may be many firms are better placed to bypass them to secure the finance they need.
Certainly some professional services firms locally such as lawyers and accountants, while still supportive of the banks, are increasingly looking at whether they can can help their clients find a more direct route to finance, when the banks (or the computer) says no.
Like many crises, it appears, in some quarters and sectors there has been a revolution in alternative finance, and Mid Norfolk MP George Freeman has also called for US style local banks.
And whether through entrepreneur-ship, social responsibility or government initiative, the fate of businesses turned away by the banks is not always sealed.
Martin Lake, Mid Norfolk chairman of the Federation of Small Businesses, said that while banks provided two very useful services to their business clients – facilitating the safe passing of money from one business to another and providing loans and overdrafts – where there is a good business case for doing so: there are many alternatives for businesses wanting finance.
“While banks should be an early call, they should not be the only call,” he said. Kevin Horne, chief executive of start up and business support organisation NWES, agreed that there were a number of other local candidates. He said: “To avoid any monopoly it is vital that a market has a variety of alternatives to traditional bank financing.
“The advent of online funding has the potential to disrupt the cosy high-street banking cartel and while it has its dangers being largely unregulated it does open up the possibility of a major player emerging in the next few years.”
But he also stated the key to successful borrowing is to establish a relationship with your lender.
“Twenty to 30 years ago this was the norm, but both banks and customers started to move towards a transactional approach which began to erode trust on both sides.
“Small-business banking was the ‘poor relation’ within banks and the emphasis was on product sales rather than a growth orientated partnership.
“Easy credit meant that businesses got away from the habit of routinely providing their bankers with information on trading performance.”
He said both parties needed to “re-learn” the essential components of a successful long-term banking relationship”.
Former banker Simon Reynolds set up B2B Cashflow Solutions with two other ex-bankers just before the banking crisis hit, aimed at putting businesses in touch with finance.
“The problem we are seeing is that on the one hand you have government initiatives like Project Merlin to ensure investment is available in the banks,” Mr Reynolds said. “Multi-millions of pounds has been promised to small businesses. It is a great PR exercise for the government and the banks.
“But in the back office the banks are under a huge amount of pressure from the Vickers Report to meet the criteria to provide capital for bad debt. The cash is being absorbed. They are under strict legislation about what they can and how they lend.”
But as part of the team which set up Clydesdale Bank in Norwich and with 25 years experience of commercial financial and business banking markets including RBS and HSBC, he works closely with the banks, often receiving referrals from them, and has a lot of sympathy with his former colleagues.
“The guys at the coal face are working really hard but in many cases getting frustrated with what they can do,” he added.
But Norfolk Chamber of Commerce chief executive Caroline Williams said that as low-risk, low-return lenders for the majority of businesses, banks offered the best deals to access finance.
She said: “Where the alternative lenders come into their own is when the risk is considered high and the banks are reluctant to lend.
“One of the restricting factors relating to the alternative lenders is that they are often small with limited funds and their rates can be high in order to be able to cover the risks they take.”
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