Banks urged to reverse steep fall in lending to small firms

Published on Thursday 16 July 2009 21:20

LENDING to Scottish businesses – particularly very small and "high-growth" firms – has fallen dramatically since the advent of the credit crunch, a new government survey has suggested.

According to the new figures, only 60 per cent of "micro" businesses, defined as having fewer than ten employees, have been able to secure any amount of finance this year – compared with 82 per cent in 2007.

Finance for high-growth companies, usually technology firms with global potential, was even more challenging. Only 44 per cent of applications were approved in 2009, compared with an approval rate of 79 per cent in 2007.

For "normal" firms, approvals fell 18 per cent over the two years.

Finance secretary John Swinney yesterday called on banks to "step up" their support for business.

"The survey shows that, although the majority of firms are able to access the finance they need, there is a significant increase in the proportion of businesses – particularly extremely small companies and high-growth firms – whose applications are unsuccessful," he said.

However, Peter Ibbetson, chairman for small business at Royal Bank of Scotland, dismissed the research, saying the number of loans RBS declined had remained consistent throughout.

He said: "From our perspective we don't recognise the statistic. About 1.5 in ten is what we traditionally see as a decline rate, so we are not seeing any difference in the downturn than we see in an upturn."

Ibbetson also claimed that the data – which was collected between April and May – was out of date.

He argued that, in the intervening months, more companies had started to take advantage of the government-backed Enterprise Finance Guarantee (EFG) scheme than the report allowed.

The 1.3 billion EFG backs lending to higher-risk businesses with a turnover of less than 25 million.

He said there were currently "300 to 400" EFG scheme cases in Scotland, while the government report said there were 200 cases.

Andy Willox, Scottish policy convener of the Federation of Small Businesses, agreed that some conditions were easing for members but said finances were still challenging.

He said: "What our members are reporting is that the panic which paralysed lending at the end of last year and beginning of this is beginning to ease. And schemes such as the Enterprise Finance Guarantee do seem to be having an effect.

"However, small firms are still facing increases in costs and other charges and a lack of flexibility in how finance is packaged, which is putting them under increased pressure at a very difficult time."

Campbell Murray, the head of the Scottish Enterprise High Growth Start Up Unit, said as a result of fewer available bank loans, high-growth businesses had become more reliant on private funding – either from business angels or existing management – and that the extra time required to chase funding could "adversely impact on the effectiveness of the management team".

Murray acknowledged that banks "were being more selective" with lending criteria and would have less of an appetite for risk backing such companies presented.

"These businesses have the potential to grow into big business for Scotland. What funding does is give them a better chance of success – although it doesn't always guarantee success," he added.

Thriving company – but it can be hard to get even 400 credit

BUSINESS for Tricia Fox, founder of Auchterarder -based marketing company Volpa, is thriving. Her company has doubled its turnover in the past year but despite this her bank has made access to even tiny lending facilities more difficult.

Fox has three full-time staff and 21 part-timers who work on promotions such as handing out leaflets.

Aware that other entrepreneurs were having overdrafts stopped, she reduced Volpa's to zero.

"I thought there was just no point in being exposed to that threat," said Fox. "It is expensive to have an overdraft. And with the business doing well, it seemed silly to keep it."

However, she has noticed that conditions are getting tighter. Recently she applied for a company credit card for a new member of staff with a "ridiculously low" spending limit of 400. Instead of getting the automatic approval she was expecting, the application was referred to the bank's lending department.

"Comparatively, when I was a much smaller business, had less staff and wasn't growing nearly as fast, about five years ago, they gave us 10,000 without blinking," she said.

According to the Scottish Government's report on lending, the main forms of finance used by SMEs in Scotland are credit cards (46 per cent) and overdrafts (36 per cent. High-growth firms are less likely to use overdrafts and leasing or hire purchase facilities than non-high growth firms, but are more likely to use credit cards.