Lending: Are the banks performing?

The banks say they are lending; businesses see otherwise. We talk to both sides about the reality of financing hopes for enterprise this year.

After thrashing out Project Merlin with the government in February, the UK’s biggest banks pledged to lend £190 billion to businesses in 2011, up from the £179 billion lent in 2010.

Though the outcome was encouraging, the very fact the talks occurred at all was symptomatic of what many regarded as a crisis in lending. Businesses during and after the recession, it seemed, were not finding it easy to prise open the banks’ coffers.

Tony Banks, chairman of Balhousie Care Group, had an expansion and refurbishment plan for his group of care homes in 2009 and needed £45 million to make it happen. At the time, he had enjoyed an excellent 12-year relationship with his bank, so hadn’t foreseen the disappointment that was to follow.

‘They wanted projections after projections and were just stalling all the time,’ says Banks. Eventually he was offered £1.5 million – on the condition that every other loan with Balhousie could be renegotiated. ‘The terms were absolutely ridiculous,’ Banks adds. ‘I asked them if they would sign that if they were in my position, and their eyes went down. I worked out that the £1.5 million they offered would have cost me £1 million over four years.’

It was a shock to the system for a company with a demonstrable record of success. ‘We had a strong, property-based business and the bank clearly was just focused on getting money in to recapitalise and get its balance sheet looking better [during the recession] rather than lending,’ says Banks. Eventually, he secured the money with two different major banks, and recommends using more than one. ‘We didn’t want to be in a situation where one bank was calling all the shots,’ he says.

John Heseltine, co-owner of juice drink company Cherrygood, experienced the same level of reticence when pitching for a loan this year, approaching a number of banks in his bid for £500,000.

‘We got the same message every time: “Come back when you’re bigger.” This was at a point when the major supermarkets had stocked our product for 12 months. I had raised money before the recession and hadn’t come across this at all – it was a completely different world.’

It didn’t help Heseltine that the bank representatives on the front line weren’t able to make any decisions. ‘Their hands were tied because they were obviously being told from on high not to lend the money. There are too many stories of good small businesses – businesses that are proven to be healthy and expanding – that haven’t been lent to, and this isn’t helped by so many banking representatives not having the power to make the big decisions.’

Eventually, Heseltine achieved success with a smaller bank that was impressed with his strong vision for the company. ‘You’ve got to treat the banks as you would treat any other investor. So, as if you were giving an investor a decent return, you have to accept that the banks want to get their money back. Also, if the bank understands your business, they’ll understand why you need their money.’ Heseltine additionally brought in a veteran financial director, which was a great benefit in persuading the bank that the numbers were in order.

Tony Banks points out that when pitching, it is essential to be very clear about what your growth plans are as a company over the next three to four years. ‘You’ve got to make it clear that as soon as you hit X target you’ll be asking for Y money, and they’ve got to sign up to that,’ he says. ‘You have to communicate your industry knowledge and ambition, and show you have the right management team and the financial structures in place to assure them that they’ll get repaid.’

Relationship banking
The case remains, however, that businesses rarely get any joy from banks without a struggle. Andy Grisdale, head of strategy at HSBC Commercial Banking, acknowledges, ‘We can always do better to service the needs of businesses.’ He adds that HSBC is putting more people on the front line to ‘engage with customers with better relationships than in the past’. So does he concede that there are instances where viable businesses seeking loans are unfairly treated by the banks?

‘There’s no doubt that there has been some tightening of lending criteria in some industry segments, which reflects the increased risk in a recessionary period,’ he says. But he also insists that the perception of banks not lending is mostly due to a depressed demand for loans.

‘I can say, hand on heart, that from our perspective the issue is largely demand-led. My application volumes are about 4 per cent down on last year but about 20 per cent down on 2008,’ he adds.

Low demand

It’s a view shared by other banks. Stephen Pegge, head of external affairs at Lloyds Banking Group, says, ‘There is evidence to suggest that many businesses that said banks were not interested in lending were not actually coming forward in the first place, and that clearly was damaging to investment in the economy.’

Both representatives insist that the figures support a healthier lending environment than is portrayed in the media. Grisdale says HSBC’s new loans to SMEs were up 19 per cent to £2.4 billion in 2010, despite loan applications being down about 4 per cent, while Pegge maintains Lloyds is ‘on track’ to hit its gross lending commitments of £44 billion this year.

But what of those businesses that do pitch for investment and are rejected? Pegge believes that if they are turned away, it is for a good reason.

‘It was always the case that some businesses were not able to attract finance. They are very much more vocal because people may have been more prepared to accept that their proposition wasn’t bankable in different circumstances, but now people are encouraged to believe you should be able to get funding,’ he says.

Indeed, viability can be a difficult call in the current environment. ‘There will be some balance sheets that are more fragile than one would look for in a bankable proposition,’ says Grisdale.

‘As a bank, we’re typically earning on average across our commercial portfolio a 2 to 3 per cent margin, and therefore our capacity to take hits on that is probably limited to two or three businesses in 100, whereas an equity player can afford probably 30 per cent to fall over and still make a return because of the embedded fees and their structure.’

If banks are worried about taking excessive risks, it stands to reason that in order to interest them, everything about your financial planning must be in perfect order.

Pegge says, ‘For us, when we’re looking at SMEs, we start with the personal side – the key principals, the owner-manager, partners or directors, their drive, skills and resources to make a success of their venture, their background and experience. We look at the business, the market and the competitive position of the organisation – whether it can continue as a viable business.’

That seems reasonable enough on the surface, but whether those principles are conducive to more lending, even under the proposals of Project Merlin, is another matter.

Heseltine is concerned that the extra funding pledged may not find its way into less privileged parts of the country. ‘I come from Middlesbrough, and it’s suffering,’ he says. ‘Post-Merlin, will company owners be able to walk into the high street banks in Middlesbrough and have the chance to talk with someone who can make the right decision?’

For the sake of growing businesses everywhere, let’s hope so.


Todd Cardy

Todd Cardy

Todd was Editor of GrowthBusiness.co.uk between 2010 and 2011 as well as being responsible for publishing our digital and printed magazines focusing on private equity and venture capital.

Related Topics