Small businesses look overseas for cash as UK lending remains scarce

Published on Saturday 21 November 2009 14:16

AMERICAN financial giants and foreign-owned banks with a base in the City are to be targeted by a leading small business organisation which sees them as potential sources of funding as Britain moves out of recession.

Ahead of next month's pre-Budget report, the Federation of Small Businesses (FSB) has acknowledged that lending has increased on the back of the government imposing requirements on bailed-out institutions, such as Royal Bank of Scotland and HBOS.

But Stephen Alambritis, head of public affairs at the FSB, which has a strong Scottish membership, said more competition was necessary.

Alambritis said: "Lending has improved. But we believe it's an opportune time for foreign organisations to test the water with SME-lending because of the unpopularity of the high street banks. There are more fertile grounds now for small businesses to consider switching to other sources of lending, be that American or continental players."

The FSB, he said, "still wants more players on the scene" against a backdrop of Britain's big four banks currently having 89 per cent of the lending market for smaller businesses.

Alambritis said: "Wells Fargo looked at the UK business lending market ten years ago but went away. But we are hearing anecdotal evidence that they and the likes of General Electric of the US might be interested. We are planning to have discussions with them."

GE, the conglomerate with operations ranging from financial services to offshore power, said recently it was bullish about investment prospects in the UK as it emerges from recession. The FSB said there may also be scope to interest an estimated 400 foreign-owned banks in the City in lending to smaller businesses.

"It is not their traditional area, but they are seeing the big four struggle and they may see it as an opportunity," Alambritis said.

Small business organisations say it has become noticeably easier to switch accounts from one financial services organisation to another since business secretary Lord Mandelson introduced a new code of practice last Easter. Under the code, banks must be able to process a switch of a small business organisation's account within five days, or ten days if borrowings are involved.

"This used to take up to two months, which was very stressful," Alambritis said.

Despite the recession, the FSB said 500,000 new small businesses will have been started in 2009 – about a quarter of these fuelled by redundancy money. Alambritis said that even though history showed that as many as three of every five of these start-ups would fail within five years it was another clear indication of a vigorous market for foreign lenders.

He said: "The FSB is aware that approximately a quarter of these new businesses will be set up by people who have lost their jobs.

"There often has to be a seismic event in a person's work pattern to convince them to set up a business themselves. That often happens in a recession."

Alambritis said that even with these failure rates the FSB would contend in its discussions with any overseas lenders thinking of entering the market that small businesses are far healthier in terms of cash than in the early 1990s recession.

FSB research shows that 36,000 small businesses have collapsed in 2009 compared with 52,000 in 1992.

"Businesses got their fingers burnt in the early 1990s. They had more money stashed away this time and that has helped them. It is therefore not an over-leveraged sector," Alambritis said.

The FSB's courting of foreign banks comes as the group is also pressing Chancellor Alistair Darling for an "indefinite postponement" of two business taxes ahead of his pre-Budget report on 9 December.

Corporation tax for small businesses is set to rise from 21p to 22p from April 2010, while the employers' national insurance contribution is due to go up 0.5 per cent from April 2011.

The FSB has commissioned research that reveals 57,000 small businesses risk going bust from these combined measures.

"There are 4.8 million small business owners out there. That's a lot of votes. We are looking for an indefinite postponement of these measures," Alambritis added.