ëRecession barometerí of small businesses highlights continued concerns over lending

The Government and banks could do more to support small businesses struggling to cope with the impact of the recession and credit crunch, a survey carried out by the Forum of Private Business (FPB) suggests.

The FPBís latest Economic Downturn Panel survey was carried out between 4 and 11 March 2009. Not a single respondent believes bank support has improved. Half report no improvement and 50% say it is getting worse. In addition, despite its raft of measures to stimulate lending to small businesses, 59% say that support from the Government has not improved and 35% believe it has deteriorated. Only 5% of respondents to the panel believe the Government is providing them with better support.

A key issue for the business owners on the Panel is the lack of information available about the Governmentís Enterprise Finance Guarantee (EFG) scheme, which was unveiled in January 2009 as ëreal helpí for business. In all, 54% of respondents are concerned at the lack of information about the scheme, 32% believe there is too much bureaucracy associated with it, 27% believe their bank will demand further security and 27% believe lenders will demand additional fees. In addition, 27% believe that enquiring about the EFG scheme will encourage lenders to perceive the business as a ëhigh riskí.

ìOur fifth Economic Downturn Panel survey highlights the continued disparity between falling interest rates and the actual cost and availability of credit. Our members believe that they are perceived as high risk and that their banks are taking advantage by keeping rates high, increasing charges and requiring more security,î said the FPBís Chief Executive, Phil Orford. ìThese issues have been made worse by the confusion and delays surrounding the numerous credit stimuli launched to date. It is vital that both Government and the banks raise their game to ensure that their public commitments to deliver additional funding are properly understood and promoted at a regional and local level. They have a duty to deliver these funds urgently.î

Another major concern for small businesses is how lenders assess and manage risk. No panellists reported an improvement in risk management, while almost half (47%) believe it has deteriorated. The FPB is concerned that lending applications submitted by small businesses are not being gauged accurately because of a lack of experienced bank mangers in local regions who are able to build relationships with business owners and judge them on a case-by-case basis.

Other issues considered to be barriers to using the EFG are that bank managers themselves do not understand the scheme (22%), fears that existing levels of borrowing might become restricted (20%), and the steep cost of finance (17%).

Compared to the previous panelís findings, the deterioration of the general business climate, including markets for products and services, competition and viability of businesses, has slowed. However, so far in March no small firms have experienced an improvement in accessing finance. The majority (82%) have seen no change to credit restrictions and just under one in five (18%) have seen access to finance deteriorate.

Despite the total amount lent in commercial loans decreasing very slightly, from 56,196,000 to 56,191,000, 4% of respondents saw a marginal improvement in terms and conditions of loans as a result of successive cuts in the Bank of England base rate and improvements to the LIBOR (inter-bank) lending rate. However, 94% experienced no improvement at all. Further, the average rate of lending from banks remains restrictively high, at 5.6% above the base rate.

In addition, 81% of the small businesses surveyed report no change in the terms and conditions of overdrafts and 16% saw a deterioration. Just 3% believe overdrafts have improved. The cost of overdrafts is also high, on average 5.9% above the Bank of England rate. Some businesses have seen their overdrafts cut or withdrawn altogether. Overall, the amount lent in overdrafts to panellists fell slightly by 20,000 from 6,943,000 to 6,923,000.

Significantly, 24% of respondents reported an increase in banking fees, including arrangement fees and transaction fees. Increasing charges on overdrafts were of particular concern.

One member of the FPB, who wished to remain anonymous because of ongoing issues with his bank, has had his overdraft rate increased from 3% to 7% above base rate.

ìItís going to be interesting to see how the banks react long term. My rates have increased by 233%, compared to what they were before,î he said. ìThe Bank of England is reducing interest rates, but the banks are adding sly little charges. I blew my top with them because weíve been with them for 30 years and weíre a steady business. What they are doing is stupendous. Iíve had to make two of my staff redundant.î