According to an official report released last month, small and medium sized businesses have had 40% of rejected loan applications for bank lending overturned by using an independently monitored appeals process.
The process was set up last year as part of the Business Finance Taskforce, an organisation established by the British Bankers Association in 2010 to look at ways to help SMEs. The scheme is available to firms with sales of less than £25 million.
Why such a high overturn rate?
The report into the scheme’s first year showed that of the 2,177 appeals made, 39.5% were overturned. Professor Russel Griggs the former head of the CBI’s small business council, who wrote the report, said that the high overturn rate was down to banks’ difficulties in switching from a ‘hard’ sales focus before the financial crisis to “moving back to a more sensible place.” This will mean retraining for many of the banks’ staff, but Professor Griggs also said that there is “still more that could and will be done to make the dialogue with customers better.”
Findings in the report also noted that credit was being ‘sold’ hard by almost all financial institutions before the financial crisis and selling individual products was at times more important than looking at a business’s overall lending needs and ability to service or repay them. This attitude needs to change.
What can change?
The Federation of Small Businesses rightly came to the conclusion that since there have me so many overturns the banks have not been lending to viable businesses. Only a small percentage of companies will actually appeal, therefore a huge number of “viable firms are having their growth plans crushed by the banks.” So what can change? That age old phrase ‘awareness’ is key again. SMEs need to be aware that they can appeal against a declined application for credit or loan.
Promoting awareness is also an essential factor for the alternative finance sector and was one of the guiding mantras for setting-up the Next Generation Finance Consortium (NGFC). The aim of this organisation is to lay the foundations of a network that can provide insight and advice into the different methods of non-bank finance and start bridging the gap between high growth businesses and investment. The NGFC was also established to create a link between new and traditional lending models to ensure business owners can find the right type and source of finance for their individual needs. The Next Generation Finance Consortium also aims to liaise with Government bodies and other organisations to lobby for support on key issues relating to SME finance.
From P2P lending, to debt-for-equity and, of course, invoice finance, SMEs will need to look at their business model and see how they can work with non-traditional bank lending. There is definitely a clear role for Government in helping to educate business owners that there are now emerging alternatives right across the financing spectrum. The Government cannot be relied on all the time however and the onus is on bodies like the Next Generation Finance Consortium to give advice and provide insight into the best course of action that a small and medium sized enterprise can take when it comes to traditional and alternative finance.