More pressure on banks to lend to small businesses

The FPB’s Chief Executive, Phil Orford, urged the Government and the banks to do more to support small businesses, including making available the promised £1bn Small Business Finance Scheme and passing on the Bank of England’s decision to cut interest rates to 1.5%, the lowest level in over 300 years.

“The FPB’s ongoing research, which also includes regular, real-time data provided by our economic downturn member panel, shows that UK lenders are still not providing sufficient funding for small businesses,” he said. “The facts are now clear. Government and Financial Services Authority (FSA) policies have not improved the ability of banks to lend. In addition, banks have not passed on, in full, the Bank of England’s previous three cuts to the cost of borrowing because many clients have fixed rate rather than variable rate arrangements.”

Mr Orford added: “The bail-out has not delivered for small businesses or for the housing market. We are calling for additional measures to improve the availability of loans and overdrafts and fior the delivery of the promised £1bn in small business funding.”

The FPB surveyed more than 6,000 members to find out how small businesses are faring in the credit crunch. Although 33% said they had applied for funds in quarter four of 2008, 27% of these were rejected outright while 20% were partially rejected. In the FPB’s previous Referendum survey, 12% of members reported difficulties in accessing finance as a barrier to developing their businesses.

The evidence shows that credit restrictions are becoming worse for many business owners. The FPB is a member of the University of Cambridge’s Centre for Business Research Banking Industry Group (BIG). The Group’s 2007 research shows that, out of the 36% of small businesses applying for finance in the previous 3 years, 12% said they were rejected outright and 17% were partially rejected.

More than 40% of FPB members said that the cost of banking has increased in the six month leading up to the Referendum survey, which was carried out in the first two weeks of December 2008. However, 82.6% did not switch banks in the same period. Only 11.8% are considering shopping around for a better deal from alternative lenders. This suggests declining competitiveness between the banks, and less choice for small business customers seeking to access finance.

Access to finance via loans has also deteriorated, according to the 12.8% of FPB members who had applied for a loan. For 4.6% of small businesses, loan facilities have been withdrawn completely. In addition, 15.1% said that the availability of overdrafts has deteriorated, with 2.5% reporting that overdraft facilities are no longer accessible.

The next three months are likely to be crucial as small firms seek to borrow in order to protect cash flow as the UK’s economy enters recession, with 24.7% of FPB members saying they expect to seek new borrowing between 1January and 31 March 2009. In addition, 7.9% expect to apply for finance between 1 April and 30 June, and 9% after 1 July.

Research carried out in the previous Referendum survey showed the issues that smaller employers believe are the main barriers to developing their businesses. Bureaucracy and over-regulation was considered to be the biggest, with 60% citing the cost of complying with regulations as a barrier. In addition, 62% identified health and safety regulations and 61% cited employment law. Other barriers were: the cost of fuel (55%), tax and national insurance payments (54%), business rates (50%), late payment and bad debt (31%), a shortage of skilled labour (26%), unfair competition (25%), the cost of raw materials (25%), local parking restrictions (20%), transport infrastructure (15%), public sector procurement (12%). Crime (12%) and supply chain issues (6%).