SMEs struck down by banks' perfect storm

IT DIDN’T come as much of a surprise when a detailed report, Access to Finance 2007 and 2010, by the Office of National Statistics (ONS) published last week, showed that lending to SMEs has fallen off a cliff.

In stark contrast to the aspirations of Project Merlin and the empty promises of two governments, the fact remains that the high street banks have slammed the door firmly shut in the face of the average SME.

One statistic in the ONS report said it all. The number of SMEs in 2010 which were given ‘no reason’ for the rejection of their loan applications was twice that of 2007. The banks are basically walking away and are not even explaining why.

And even for those SMEs that are ‘fortunate’ enough to be invited in, usually because they have sufficient assets or the directors have given significant personal guarantees, the loans on offer are often a double-edged sword.

For example, we recently dealt with a company that was offered a loan, the terms of which were so severe that the loan would not just have constrained its growth, but potentially threatened its survival.

Other banks, meanwhile, will lend money, but only on the condition that they decide how and when that money is spent. Given that they will have, at most, a cursory understanding of the businesses they are lending to, this is clearly absurd.

In other words, even if SMEs do get offered a loan, the terms are often so prohibitive, or so ludicrous, that they are better off without it. They’re damned if they do and damned if they don’t. But potentially the biggest issue of all is the inability of the banks to base their lending decisions on a company’s future potential rather than its recent past.

After all, during the extraordinary economic climate of the past two to three years, even the most viable SMEs have under-performed, or maybe moved sideways, but the banks appear incapable of taking this into account.

They seem incapable of looking at an application qualitatively, up close, on a case-by-case basis. Hardly surprising given that they have dispatched with the services of many of the older, more experienced and more traditional bank managers who took the time to really know their clients. Instead, the banks’ faceless automata make decisions on the numbers alone, even though in many cases the numbers do not tell the whole story.

It’s this short-sightedness that is short-circuiting the economy and inhibiting its growth. The Q3 GDP figure of 0.5% is proof of an engine that is idling. And it’s the banks that have taken away the spark.

But the UK’s SMEs are nothing if not entrepreneurial. They are increasingly waking up to the fact that there are alternative sources of funding. And, equally importantly, that these alternatives bring more to the table than hard cash.

These finance providers can offer intellectual capital, strategic advice and business nous, something the banks, have never been able to provide – and never will.

The banks may not have an appetite to fund, but there are many other investors out there who do. And, over time, these companies will take a far bigger share of the market than the banks would ever have anticipated.

Stewart Baird is CEO of Stone Venture Partners