Alan Sugar, boring banks & the myth of the small business lending crisis

As Lord Sugar dismisses small businesses who can’t get loans from their banks as ‘moaners’, Alex Bellinger asks, is the small business lending crisis a myth?

By
4th November 2009 at 6:43 pm

Yesterday the government announced a retail banking sell off of RBS and Lloyds branches to re-establish competition in the consumer and small business banking markets.

John McFall, chair of the Treasury Select Committee welcomed a return to the era of ‘boring banks‘.

Alan Sugar criticises small business moaners

Is Lord Sugar taking the piss, when he moans about moaning small business owners?

Meanwhile Alan Sugar, The Apprentice star and government Enterprise Champion, was typically brutal in his assessment of firms blaming banks for their misfortunes.

At an event in Manchester last night, he called the bosses of small firms complaining about not being able to access bank lending, ‘moaners’ who ‘lived in Disneyland’ – much to the dismay of small business groups and many in the media.

Not a great piece of timing on Lord Sugar’s part, but he does have a point.

Many businesses I talk to say while there’s still very much a crunch when it comes to credit, they want to pay off borrowing. They don’t want to increase their debt.

To ask banks to be lending more and businesses to be borrowing more during the worst recession in a generation is entirely counter-intuitive and, you could argue, makes no business sense either for banks or most SMEs.

But robust businesses with strong balance sheets and assets can still obtain lending, if they want it. Yes, businesses fail in recessions, but throwing money at failing businesses isn’t going to make them better, sustainable businesses.

I spoke to Martyn Shiner, the FD of a South West manufacturer Severn Delta, a few weeks back and he agreed with me, saying:

When other small businesses bleat about not being able to finance their business, I think, but are you providing timely management accounts, can you tell me what your margins are, can you tell me what the risks are in your business – and most of them haven’t got a clue.

To be fair, Martyn went on to concede that since most of the UK’s 4 million plus businesses are at the micro end, like consumers, they probably borrowed because borrowing was easy and got used to the habit.

The banks were lax, had lending targets to meet and free money to give away. They then slammed on the breaks too hard and left many SMEs floundering to cope with the new world of austerity we’re once again living in.

But it’s easy to forget, the last time the mighty NatWest (owned by RBS) made an almost unheard of loss, before the current fiasco, was during the major recession of the early 1990s. Why?

Not because of derivatives, but because of huge bad debts incurred by lending in the domestic commercial and small business sector.

So what of small businesses feeling the pain?

Earlier this afternoon I talked to Peter Riches owner of a small Shropshire-based web development company, BeVivid who describes bank lending, or rather lack of it, as ‘diabolical’.

His company has for months sought lending for business development funding and a new product, but RBS, Barclays and Lloyds have all turned him down flat.

Banks have never been keen on web businesses, or on funding new concepts. But lending to innovative businesses and lending to growing business really ought to be considered.

But largely, I think there’s a strong case for saying the small business lending crisis is a myth.

Strong businesses will borrow, if they want to, despite unjustifiably high interest rates. Weak businesses will go to the wall. Some one-man or one-woman bands will just slip away unnoticed.

But what about the massive decline in bank lending figures as recorded by the Bank of England this year?

What about the lack of take up of the Enterprise Finance Guarantee scheme which to end October has seen just 6,100 businesses find funding of £620 million, some way behind target?

Well maybe the demand for borrowing is just not there right now. And maybe that’s a good thing.

The huge growth in SMEs in the UK over the last decade was, in my opinion, debt fuelled.

It’s no surprise many are finding it hard to break the debt habit the banks themselves pushed, like street corner crack dealers.

[Picture credit: Jason Cartwright licenced from Flickr]

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Alex is the founder and editor of SmallBizPod, the UK's first podcast dedicated to small business, start-ups and entrepreneurship. Alex writes about topical small business issues, entrepreneurs and anything else that catches his eye here on the small business blog. http://www.smallbizpod.co.uk

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  1. Martyn Shiner says:

    Alex

    Spot on.

    Clive and I went through the pain of ‘aggressive negotiations’ with our bank in ’03. Not pleasant, but looking back absolutely necessary.

    We restructured, focused (worked our b***s off) and did all the things we needed to do to survive. And saved 40 odd jobs in the process. Since then we have been open and honest with our bank about prospects, provided monthly management accounts, answered their concerns where necessary…. they in turn have been supportive of us in that time.

    Banks are there to make money – they will lend if they think they can turn a coin…. and get their money back. If they don’t, they wont. Simples!

    Oh and BTW…. thanks for the hat tip.

    Martyn

  2. Thanks Martyn for your time the other day & shrewd observations.

    When we see lending and borrowing rise naturally, we’ll know the recession is behind us, I reckon.

  3. i think there are some interesting points raised.

    the sums re EFG scheme are one. on average each of the 6100 firms in receipt of it received £100k each. i think a lot of smaller companeis that need a helping hand require much smaller sums than this to get them through troubled times.

    some smaller firms need to apply some of the practices of larger orgs and have better plans, goals, strategies in place. they should be measuring their effectiveness each month with a simple scorecard.

    if they were doing some of these things then perhaps they would be getting the help they require.

    i think one of the problems faced is that we’ve seen banks bailed-out, city bonuses still on the go, MP’s milking the system for their own gain and, rightly so perhaps, many small biz, say “me too” thinking that the money is easy to obtain as it’s been dished out to everyone else.

    problem is, a small firm going under doesn’t make the front page of the sun however a carmaker going under does. yet this country needs the small businesses to thrive, the media should change their focus too help them as well. the FSB and FPB should be doing more to get the complete picture onto front page of national newspapers.

  4. Martyn Shiner says:

    Mike

    Good points about the media and govt focusing on big business – I have this view that many large business are as much ‘agents of the state’ as public sector organisations – especially where there are high barriers to entry based on regulation or access to govt contracts (banks, telecoms and defence are good examples).

    Lowering barriers to entry, freeing up markets and getting rid of red tape will do more to help small businesses than unsound lending by banks.

    Will this happen? No. Not even under the Torys as there are too many vested interests and seats on boards available.

  5. Interesting article, Alex.

    Just thought I’d share my own conversations with our bank on the matter; we’ve been mulling over our fundraising options, not to staunch bleeding, but to fund growth in 2010. Obviously as Directors, it’s our duty to our shareholder to try and get the most effective funding mix for growth so looking at the debt options available alongside or instead of dilutive equity is good practice.

    The EFG is a good example. There is no difference in the ease of accessing this government backed credit as there is for a straight loan from the banks, independent of government. The EFG credit committee process is fully delegated to the banks by the government and the banks are being just as stringent on approving these loans as they are for their loans on their own book with no government guarantee. Also, banks are typically requesting a PG from Directors for the unguaranteed 25%. Finally, this money isn’t cheap, what with the 2% guarantee fee and high margins being charged; my understanding is that most businessses would be lucky to get an EFG loans for less than 10% annual cost. This is the guidance our account manager gave me re Arena and we’re turning over several million pounds, we’re profitable and we have a solid balance sheet; we’re no hospital patient.

    For us, this may still be a good option to consider alongside equity funding (ie matched equity and debt to reduce dilution but manage the financing cost) but my point here isn’t really about us but about the fallacy of the EFG and who it’s supposed to help.

    The banks don’t really want to lend the money, government guarantee or not. So they’re making it pretty hard. Fair enough.

    Companies can’t really get the money, unless they don’t need it.

    That’s the issue. I totally agree that 1) banks shouldn’t lend to companies that can’t support themselves as that should be equity risk, not debt risk and 2) companies are kidding themselves if they think they can refinance their business via (cheap) government backed debt if their need is so dire. Equity risk requires equity funding and equity returns to the investor.

    So all the above is fine and makes sense. It’s just that it’s the scheme is therefore flawed as those it’s *supposed* to be for (according to the trumpeting politicians) can’t really access it, and those that do qualify for it won’t really want to use it (at least not for its stated aims) as it’s too expensive and unwieldy. The only people who *might* use it, in my opinion, are those who don’t need the money but see it as a cheaper alternative to equity funding, or as part of a blended fund raising mix in a non distressed funding raising round; ie healthy companies who see an opportunity to get some extra cash in to put the boot into their struggling competition.

    Anyway, the above was a bit of a ramble but I hope of some interest, given my direct involvement in discussion on the matter with our bank.

    Over and out!

  6. Will, what a great comment, particularly re the EFG and your own experiences.

    This particular internet footpath is always open for you to ramble over 😉

    The cost of debt in terms of interest rates is perhaps the real headache and I think small businesses have every right to be angry about some banks’ lending terms.

    This is where the government should be putting pressure on the banks.

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