Bank lending data backs this view, with successive reports on the Funding for Lending Scheme showing a net retraction in lending to small businesses, even after tweaks to try and make it even more beneficial to lend to that cohort of business.
Of course, it is not all the government’s fault. There are other parties who have contributed to the statistics, including businesses themselves, some of whom have been repaying rather than borrowing more over the last few years.
This ‘net depositor’ phenomenon is compounded by the fact that many businesses are proving very reluctant to switch banks. Although there is no easy breakdown of figures from the Payments Council, their data on bank switching (since the 7-day switch guarantee was introduced) suggests very few businesses are moving away from the major banks in their account provision. In fact, when businesses do move, the Forum’s own data suggests they move to another of the big four.
However, central to this problem remains the main lending institutions of the country some of whom, despite being part-owned by the country, continue to take actions that will only serve to reduce their lending exposure to small businesses further.
Take the closure of bank branches, which continues apace amongst three of the big four banks. Only Lloyds, which has a moratorium on closures for a few more months, has resisted cutting down their branches and therefore limit the opportunities for businesses to have face to face interaction with their bank managers. Despite pressure from groups such as the Campaign for Community Banking and perfectly reasonable policy solutions that could be adopted to help stem the loss of branches, they continue to decline.
So it is that the Forum of Private Business has reached the conclusion that we simply have to move on beyond these major lending institutions and do all we can to encourage existing and new small businesses away from the major banking sector, instead ensuring they are catered for by a more competitive challenger bank sector, as well as the rapidly growing peer-to-peer sector. There are a number of ways of doing this.
The Small Business Bill currently before Parliament is one example. It contains a measure that will see businesses automatically matched to an alternative lender but only once a bank has refused the business finance. The Forum has stressed that such a referral should be offered before the business is refused, both in order to protect credit reports but also to stop a risk of disincentivising entrepreneurs seeking the finance. We would much rather see businesses offered a referral at first stage, with the bank at the very most doing a soft check to give an indication of whether it will fund.
Another issue the Treasury is currently considering is to what sort of platform a business should be referred. Given the wide variety of lenders out there, they understandably want to guard against an individual business being overwhelmed with offers of finance from multiple lenders. The main banks are also arguing their case to be part of the referral platform as well, meaning a business turned down for lending by RBS might be matched with Lloyds. Although we recognise the most important outcome is that a business gets the funding it needs, it sort of defeats the object if that funding simply comes from another large operation.
For years, our members have been telling us that trust remains a big issue in seeking finance from non-bank lenders. Although the lending figures coming out of Funding Circle, Platform Black and the like have been immensely impressive, only time – and a clean record – can demonstrate to businesses that have this fear factor that such outfits are robust and trustworthy. Regulation has already helped that confidence, as has significant government investment through them as part of the Business Finance Partnership.
So, to conclude, what are the main parties offering to help boost lending beyond the main banks following the general election? Arguably, the most interesting suggestion comes from the Labour Party, which is looking to bring over to the UK a similar system to the German Sparkassen model, that is to say a more local lending model. That would surely require, as a first policy measure, immediate intervention to prevent branch sell off. It is estimated that such banks account for more than a third of the German banking industry and has the potential to be a big, positive disrupter of the current system.
Whatever does happen at the election and whichever party or parties assume power, The Forum is urging them to take firm and wide-ranging action to convince small businesses away from their dependency on the big four banks.