Trust is breaking down between small businesses and banks as rates are hiked and local services are withdrawn

WHEN Ron Warbrick bought a picture gallery and framing business in Ayr, he wanted to leave behind a lifetime spent setting up computer systems to work with his hands, framing pictures in the shop he had spent time visiting as a customer.

Six years later and Warbrick is feeling the strain from the amount of red tape and bureaucracy strangling his company, from punitive business rates to high interest rates and a lack of advice from his bank.

"The banking and financing is a nightmare," he says. "Until very recently, staff in the branch were trying to sell me insurance or arrange a bank account review every time I went to pay in money. But when you want really big advice on a 250,000 loan to buy premises, they're just not interested."

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Having been a Bank of Scotland customer all his adult life, Warbrick says he had no hesitation going to the bank when he took over the business, which had been running from the same prime location at the top of the town's high street since 1990.

Although he is happy with the day-to-day service he has received in his local branch and through internet banking, Warbrick had to abandon his plans to move shop because of a lack of support from the bank.

Warbrick had received good advice from his business relationship manager – who was a mere ten minutes' drive away in Prestwick – including details of good and bad locations. But then he discovered the manager's post was being axed and he had to hunt for the right person in an Edinburgh call centre to discuss his needs.

"My lease was up and I was getting very close to moving to get my costs down," Warbrick says. "The young lady in Edinburgh was very helpful but when I began to quiz her I found out that she wasn't allowed to leave her desk. She knew Ayr in general terms because she'd come here on holiday but she had no idea what street was what.

"All she was able to give me were the technical details – like needing one third of the cost of the property as a deposit – and that was it. It was all done remotely and it was all about money. There was no advice about property at all."

Warbrick also watched as the Bank of England's base rate continued to fall, but the interest rate on his existing lending remained at 8 per cent. When he asked whether he could continue at his present rate when he took out a commercial mortgage, the idea was not even entertained, with the reply coming back that the fresh lending would be treated as an entirely different case.

Although his business is doing well – and in two weeks' time will become the only framing shop in Ayr, following the closure of four rivals – he has been left disappointed by his treatment at the hands of his bank and has considered switching lender.

Warbrick is not alone in his dissatisfaction with Scotland's banks: in November, nearly one third reported that the cost of their existing credit – such as loans and overdrafts – had risen in the previous two months, while more than one in four businesses said the cost of new credit had increased. One quarter of firms said they had been completely refused credit by their bank.

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While 41 per cent of those firms that had been charged more for the borrowing said the increase was between 2 and 3 percentage points, the statistics mask some real horror stories. Ten per cent of companies said the cost of their existing credit had risen by between 10 and 14 percentage points, while a further 12 per cent of respondents reported the cost rocketing by more than 15 percentage points.

With the Bank of England's base rate lodged firmly at 0.5 per cent, the higher costs of credit make for unpalatable reading. "It's not just about lending figures going up," says Colin Borland, from the Federation of Small Businesses (FSB) Scotland, which carried out the survey. "You have to look behind the headlines and ask how much firms are paying for credit."

While acknowledging that schemes such as the UK government's enterprise finance guarantee have made a difference to the amount being loaned to businesses, Borland believes higher credit charges and a lack of personal contact with key bank staff are affecting trust between small businesses and their lenders.

"At a time when bankers are not held in universally high public regard, it should be a source of encouragement for them that these business relationship managers were hugely well-respected," he says. "Our members might not always have agreed with their decisions but they knew the decisions were taken from a position of knowledge. We've had members complaining about this from Elgin, Kilmarnock, Grangemouth, Ayr – these aren't tiny rural backwaters where the service was unsustainable, these are busy places."

With rumours swirling of new entrants to the banking market in the UK, Borland says having frontline staff to talk to business people in branches could become a big selling point. "It's more than a marketing tool – it's essential," he says. "If any of the new banks that are thought to be eyeing the UK want to break into the Scottish small business banking market then they're going to need a branch network.

"You can see that from the market shares held by existing players. Look at HSBC for example. When it bought Midland Bank, it inherited a large branch network and so has a healthy share of the market south of the Border. But Midland did not have a branch network in Scotland and so HSBC's market share here is low. It's what our members tell us that they want – they want somewhere they can go to pay in cash and have a human link."

Borland says trust plays a key role in the desire of many small and medium-sized enterprises to see the UK government go through with its proposals to create a "post bank", built on the existing network of post offices throughout the country. Despite the postal strikes that crippled many retailers in the run-up to Christmas, Borland says small businesses's support for the Post Office is undeterred. Figures from the FSB show that 38 per cent of small businesses would switch their account to the Post Office tomorrow if a full range of services was on offer. A further 18 per cent said they would make the move if the service took off.

Borland says the market for a new entrant such as the post bank is huge – with about 270,000 companies in Scotland and about 75 per cent of the business banking market controlled by part-nationalised lenders Lloyds Banking Group – which owns Bank of Scotland and Lloyds TSB Scotland – and Royal Bank of Scotland. With trust being a key component in the relationship between banks and their customers, he called on Bank of Scotland to reintroduce its business relationship managers, as the move would be "good for customers and good for the bank".

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A spokesman for the Bank of Scotland has disputed FSB Scotland's complaints over the withdrawal of the service in some parts of the country. "In a small number of locations, we found that most of the contact between the bank and its customers was sporadic and over the telephone," a spokesman said. "This meant it was no longer commercially viable in these cases to keep a face-to-face business manager. Customers who currently have a face-to-face business manager will still be looked after by a business manager from one of our Commercial Centres. These business managers will travel out to see their customers on a regular basis."

The bank says it has increased the amount of lending and the number of SME customers in Scotland since introducing the new policy.