Bring back traditional bank managers and increase competition, says business group in the wake of Project Merlin’s poor lending figures.

The Forum of Private Business is responding to the announcement that the UK’s major banks are more than £2 billion short of hitting their small business lending target by repeating its calls for better competition, more investment in regional branches and the restoration of lending powers to local bank managers. As part of their commitment to lending £190 billion to businesses in 2011 – including £76 billion to small and medium-sized companies – the ‘big five’ banks have pledged to lend £19 billion in the first three months of the year. However, just £16.8 billion has been lent.

According to a joint statement by Project Merlin banks small business lending demand has declined. While the Forum’s own research suggests many firms are focusing on consolidation not growth, the not-for-profit organisation is arguing that this downturn is a result of mounting alienation due to lenders’ punitive risk criteria and inflated interest rates, rather than indicative of a lack of need for affordable finance.

“I am disappointed but, frankly, not surprised that these SME lending targets have not been met – we are prepared to wait until the end of the year before making a final judgement but it is clear the banks are trotting out the same old excuses when they are simply not delivering on the ground,” said the Forum’s Chief Executive Phil Orford. “There is a widening knowledge gap when it comes to lenders’ ability to gauge small business risk. We want to see banks invest in regional services, and also hand decision making powers back to local branch managers who are best placed to make key lending decisions based on realistic assessments of individual businesses. We must move away from the over-centralised, tick-box mentality we are seeing now.”

Pointing to the latest official government figures on SME finance Mr Orford added: “Despite what the banks are saying, the requirement for affordable funding is not going away. There is a real, pressing need for better, more cost-effective growth finance. The problem is that small businesses are becoming increasingly alienated by mainstream lenders. “More and more our members are seeking out alternatives but one of the major barriers is a lack of competition in finance markets dominated by the big banks. The few new and innovative funding platforms that are out there struggle to gain a toe hold. “To reiterate what we have said before, a lending code that is not binding, targets that banks are not meeting and mentoring and appeals schemes of unproven merit are just not enough to fix this serious problem.”

Finance requirements of SME employers – latest government figures
The latest small business survey carried out by the Department of Business, Innovation and Skills (BIS) shows that 26 percent of SME employers sought finance in 2010, up from 23 percent recorded in 2006/07. Demand was higher among firms in primary industries, with 45 percent seeking finance, compared to business services (22 percent). According to the report small businesses in construction, transport, retail and distribution were significantly more likely to have sought finance compared to the previous survey.

The BIS research shows 32 percent of newer businesses sought to access finance, compared to 22 percent of those trading for ten years or more. By size, medium-sized businesses (four percent) were much more likely to seek finance than small (33 percent) or micro businesses (25 percent). In all, 51 percent of SMEs seeking finance experienced difficulties obtaining funding from the first source they approached – more than twice the number in the same survey carried out in 07/08. More than a third (35 percent) were unable to obtain any finance at all. Sectors in which difficulties in accessing finance were most commonly encountered were construction (60 percent) and transport, retail and distribution (56%). Firms seeking overdrafts were more likely to encounter difficulties than those who sought bank loans (56 percent compared to 48 percent).