Fair lending for small businesses
Prospect and the Lending Standards Board held a round-table at Conservative Party Conference on fair lending for small businesses. The event brought together business representatives, policy makers and lenders to discuss an area that has been a particular focus of UK public policy in recent years. Access to finance has been identified as a key issue by small business organisations since before the financial crisis, and as a possible impediment to UK economic growth. This is not a new challenge – indeed UK policymakers have been discussing it since at least the 1930s. But it still often seems that whilst large firms have access to a variety of financing options from the City and households have access to a huge range of secured and unsecured lending products, small to medium sized businesses often feel under served by British banking.
As David Pickering, Chief Executive of the Lending Standards Board (LSB), argued, this picture has not been helped by high profile examples of poor practice in the years immediately after the recession. However, as he noted, the landscape had changed considerably over the past few years with the entry of new institutions into the marketplace, some public policy changes and concerted new efforts from existing lenders. After focusing mainly on personal lending over the past four years, the LSB is now turning its own attention to the question of SME banking.
Ruby Peacock of the Federation of Small Businesses was keen to note, that there are over five million small businesses in the UK and their needs vary considerably. In some corners of the sector there are still trust issues when it comes to banks that can make business owners reluctant to seek debt finance. More generally though there is still a large information gap facing many smaller firms. Compared to the process of getting an individual mortgage, the process for getting a business loan was far more complex. And whilst it is relatively straightforward to find a household mortgage broker, it was much harder to seek expert advice on the process of business lending.
Participants in general agreed that access to information was a still a problem facing SMEs. Both Carmen Dixon of Lendinvest and Emma Thomas of Experian spoke about how their firms have been involved in mentoring growing businesses and helping to plug that information gap. It was generally thought that business organisations and associations had a big role to play in providing information to their members and that government schemes, such as the British Business Bank’s guide to business finance, had proved useful.
One wider issue that drew attention was the relative place of debt vs equity finance for UK SMEs. Jon Whitehouse of Barclays argued that access to equity investment – which was often more appropriate for an SME than debt finance – was a still a problem in the UK, where the pool of available venture capital funding was roughly (per capita) only around a sixth the size of that available in the USA. Whilst banks may not be the ultimate source of equity finance, they still had an advisory role to play in pointing SMEs in the right direction.
It was noted that whilst SME debt finance was thought to be generally available in most regions of the UK, equity finance was very much concentrated in London, the South East of England and Cambridge. Furthermore, equity finance did not have a supply problem but potentially a demand one – many UK SMEs have been historically reluctant to cede any control in their firms via equity injections. Again, it was agreed that there was a role here for the better provision of information on exactly what equity finance might entail.
One topic for discussion was the role of face to face banking vs online banking in SME lending. John van Kuffeler, of Non-Standard Finance plc, explained how all of his business’s lending decisions were made after face to face contact. Unlike mortgage lending – which is greatly aided by property valuations and credit scoring – most SME lending was, mainly, “bespoke”. Andy Homer from Aldermore, the challenger bank, agreed that SME lending was a more complicated proposition for a bank than personal lending and argued that this was a good reason for a more diverse UK financial system, with different institutions playing to different strengths.
The business representatives at the table noted that SMEs often did favour the idea of having a named relationship manager at their lenders, someone who they thought understood their business.
In general, it was agreed that, compared to five years ago, SME lending in the UK was in a better place. New lenders entering the market have provided SMEs with a greater range of options whilst the incumbents have improved their own offerings. Policy changes- such as the introduction of the British Business Bank have also helped. That being said, it was hard to separate out the improvements driven by a changing industry from the fact that the economy itself was in a better position than in the immediate post-crisis years. As David Pickering noted in his closing statement, good progress has been made, although there is still more to do.
With the support of the Lending Standards Board (LSB), Prospect hosted a round table discussion at the 2017 Conservative Party Conference on how implementing fair lending standards for SMEs could help facilitate economic growth.
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