Bankruptcy fear for small businesses starved of borrowing

Forum decides to monitor bank lending to smaller companies

November 12, 2008

Representatives of small businesses and of the banking industry exchanged frank views during the first meeting of the Government's Small Business Forum yesterday, as the economic downturn and upcoming recession prompted small businesses to warn of a slew of bankruptcies within weeks if banks hold back on lending.

Both sides said afterwards that the exchange of views had been a positive step in itself, although they remained reserved on whether the meeting would lead to the desired changes in practices. At the meeting, the sides agreed to the creation of a new panel to monitor how banks are lending to small businesses.

The five major high street banks agreed to provide data on the availability, risk and overall cost of lending to small and medium-sized businesses.

However, before the meeting, the chief executive of the Federation of Small Businesses, David Frost, said: "If things carry on like this, many sound UK businesses will be bust by Christmas."

Chris Hannant, the head of policy for another small business organisation, the British Chambers of Commerce (BCC), said: "It was reasonably constructive but the jury is still out. The sentiment was to try and take this forward fast and have agreement on some stuff before the end of the year."

He added that it was positive that the banks are willing to "engage and establish the facts".

Lord Mandelson of Foy and Hartlepool, the Business Secretary, chaired the first meeting of the forum, set up last month to address smaller companies' financial concerns.

The British Bankers' Association's chief executive, Angela Knight, brought 10 "promises" to the meeting, including an undertaking to provide competitively priced loans and help for companies to get access to independent advisors. Banks also promised to be accountable to customers by explaining to them in writing the reasons for turning down any loan.

Ms Knight, after the meeting, said the meeting had been a success, pointing to banks agreeing to open up and make information such as data on lending more available. "We all understand the concern with what happens going into a downturn," she said. "We are all going to keep talking and meeting."

Small companies have raised worries about bank-loan arrangements being changed in response to tougher economic conditions and representatives of small businesses expressed fears of further difficulties in securing credit lines from banks. They want the Government to pressure banks to free up cash for them as the recession bites. Many are already feeling the pressure, which is being worsened by a perceived increased reluctance by banks to lend.

An FSB statement before the meeting said: "The banks must be held to account on their lending practices at this and subsequent meetings and there must be agreement on how the banks must act and how the Government can enforce this." The FSB wants banks to continue lending at the 2007 levels – and wants the Government to use its share in the banks to force them to do so. The BCC added that banks need to act fast.

Small business representative came armed with anecdotal cases of banks having tightened their lending, raised the rates they charge customers or even clawed back money from existing customers by adding fees and conditions to existing credit facilities.

Despite the progress made, some small business representatives expressed frustration at the slow pace of progress. The FSB representative at the meeting, Andrew Cave, said afterwards that he would like to see more progress than was made and more action from the Government to help his members. "The economic downturn is happening in real-time," he said. "The Government's action is happening in slow motion."