Social lenders step in to ensure the wheels of industry keep turning

Published on Saturday 25 July 2009 14:25

WHEN IAIN Murray set out to start his own technology firm he knew it would be no easy feat, but he had little idea that a problem with dodgy American mortgages would potentially scupper his well-laid plans.

As he and his two business partners, Gordon Fleming and Kenny Williamson, finalised the model for their company Kigtek Solutions, in Bellshill in 2007, they imagined that securing the necessary finance from their bank would be a relatively straightforward process. Having done the numbers, they had drawn up a viable business plan and were all ready with their idea to develop monitoring technology for the whisky and energy industries.

But after several meetings with their high street bank, the ambitious threesome started to worry. Although their bank manager was making plenty of positive noises there was no sign of the much-needed finance on the horizon. Having resigned from their previous jobs to follow their dream, they began to despair as the newspapers bannered headlines about a drought in bank lending.

"The high street lenders were a disaster effectively and still are," says Murray. "We went through various hoops with our bank, applying for overdrafts and loans, and at this point none of them have come good. They tell us they are open for business but they have been terrible."

Still determined to work for themselves, Murray, Fleming and Williamson searched for other potential sources of income and, through a recommendation from Business Gateway earlier this year, they landed upon DSL Business Finance, a not-for-profit "social lender". DSL runs a 1.5m loan fund for small and start-up firms and returns any profits to the fund to lend to other businesses, particularly those situated in disadvantaged areas.

Two months later, Kigtek secured a 35,000 loan and moved into premises at the Strathclyde business park in March. So far the company has four members of staff, but hopes to employ another two by December. "We are pretty much on track for the business plan and figures," says Murray.

Kigtek Solutions isn't alone in turning to more unusual sources of funding.

According to Scottish government figures released this month, lending to Scottish businesses, particularly in the small and high-growth bracket, has plummeted since the onset of the credit crunch. Although traditional banks such as Royal Bank of Scotland insist they are open for business, small business lobby groups say that in reality companies continue to face severe problems either because they can't secure a loan or because the terms of an existing facility have changed.

The UK government has grown so concerned by the situation that it has summoned the bosses of Royal Bank of Scotland, Lloyds, Barclays, HSBC, Santander and Nationwide to Whitehall tomorrow for a grilling from Chancellor Alistair Darling, Business Secretary Lord Peter Mandelson and other key ministers.

But while political leaders and banking chiefs talk shop in London, firms at the coal face in Scotland are exhausting every avenue to find the money they need to grow their businesses. As a result, social and ethical lenders have reported a boom in enquiries over the past 12 months.

Between 2008 and 2009 loan applications to DSL increased by 157 per cent. It lent just short of 1m, compared with 277,500 the previous year.

The Co-operative Bank, which prides itself on its old-fashioned, ethical approach to banking, has reported a similar trend even among large corporates. Its corporate lending book has grown from 3.4bn to 4.2bn between 2007 and 2008. Interest has been so strong that a corporate banking centre will open in Edinburgh in March to service Scottish firms with a turnover between 1m and 50m.

Craig Campbell, previously head of community banking at HBOS, is also hoping to set up a social bank in Scotland within the next two years, although this would be restricted to companies such as the Big Issue which have a social objective.

Keith Alderson, director of corporate banking at The Co-operative Bank, says many UK businesses appear to have lost faith with their traditional banks.

He says: "We are finding increasingly now that a number of businesses are picking up the phone to us and talking to us about lending arrangements partly because they are finding it difficult to raise credit from an incumbent bank. For every 1 that we lend we make sure we have at least 1 of customer deposit, which is important because when the wholesale markets started drying up, that didn't hurt us as much as it did others."

Alderson believes that both corporate and retail customers are starting to choose banks for their business models after well-known names went to the wall last year.

"We are owned by our members ultimately," he says. "We are not under any pressure to deliver X amount of profit or dividend each year so we have been able to take a long-term view of the business."

DSL Business Finance says small firms are now viewing social lenders as a first port of call as opposed to a last resort. Demand for services has grown so substantially since the onset of the credit crunch that it has decided to expand into east and central Scotland after previously only servicing the west.

Eunice Lancaster, general manager of DSL, says that before the recession around 60 per cent of its loans went to start-ups.

She says: "Now we are seeing a greater increase in existing businesses because they are struggling to get money. For instance, if they have been using their overdraft to the limit, some of them have found that the bank has slowly withdrawn that level of overdraft."

Several small firms told Scotland on Sunday that interest rates tend to be higher from social lenders, but Lancaster insists that there is little difference.

"Our interest rates are comparable to what the high street is offering for unsecured loans," she says. "Probably the main difference is we spend more time with the person. We are looking at the economic impact of a business. We try to make these firms do better, become more stable. We'll certainly spend a couple of hours going out to their business and looking at what they do. I suppose that in a sense what we do is very old-fashioned banking."

Social lenders may be more willing to lend in the current climate, but both the Co-op and DSL warn that they aren't prepared to hand out loans to every enterprise in need. Since opening its doors in 1992, the Co-op has turned away 1bn worth of business while DSL says its rejection rate is approximately 40 per cent.

"We don't say yes to everybody," says Lancaster. "For example, if they have got too much debt already. If we think it's a turkey and not going anywhere we'll say no. It has got to be viable."