The truth about bank lending

Tighter security terms. Higher borrowing costs. Personal guarantees as standard. But don’t worry, the banks are still ‘open for business’. Or are they?

‘Every year for the past ten years we’ve opened a new site. There’s just no way we can do that this year,’ laments Cheryl Hadland, the founder of Reside Care Homes.

In Hadland’s view, the banks are continuing to prioritise putting as much cash as possible on their balance sheets rather than supporting growing businesses. ‘We’re waiting until they can lend to us on more favourable terms. At the moment, we just don’t have the security to put down against the loans we are after.

‘I definitely don’t feel we are seeing any more bank lending; it still feels like they are grabbing everything they can. My bank manager has said: “I know you’re a good company, but don’t even bother asking for finance now,”’ she says.

Hadland’s story is by no means unique. The Bank of England recently reported that UK firms are continuing to be deprived of credit, with bank lending to companies outside the financial sector showing its first year-on-year decline – a shrinkage of 1.2 per cent in the 12 months to June.

Personal guarantees against a loan, although nothing new, are now standard procedure for entrepreneurs if finance is going to be made available. Steve Cooper, managing director of Barclays Local, argues that in this risk-averse climate it makes sense in many instances to ask for additional security and insurance: ‘We believe a personal guarantee is often necessary as the likelihood of a business deferring a loan repayment reduces by 40 per cent,’ he says.

Are you worthy?

Over the past couple of months, there has been a discernible improvement among certain banks as it has become apparent that the world isn’t going to end. The terms of borrowing may be more onerous but that shouldn’t be confused with believing that no money is available.

Barclays’ Cooper explains: ‘It’s true that people are finding it harder to obtain money, but maybe that’s no bad thing as we are still in a pretty difficult economic environment, so it should be harder to get money. At the moment, we’re approving around 70 to 75 per cent of borrowing requests.’

Stephen Pegge, communications director for Lloyds TSB, quotes similar figures for the bank’s approval rates (down to 75 per cent, compared with 85 per cent in 2007). However, he attributes this drop-off in lending to a fall in demand. ‘What has been surprising about this recession compared with others is that overdrafts haven’t been growing very fast,’ he says. ‘I think that’s because a lot of businesses have rapidly reduced their stock [so they don’t need to have working capital in this form].’

‘Six months ago it was very hard. Now it’s just hard’

Huw Morgan, head of business banking at HSBC, observes that the number of loan approvals for growing businesses is increasing, although overall lending is now down by 15 per cent compared with six months ago. ‘The fall in lending is mainly due to businesses hunkering down – and so they aren’t looking for more credit,’ says Morgan. (The decline in applications may also be related to prohibitive borrowing costs. According to research from the Forum of Private Business, the average overdraft lending rate is now 6.6 per cent – far above the 0.5 per cent Bank of England base rate.)

Morgan is cautiously hopeful about the future. ‘I wouldn’t be as confident as to say that things have improved a lot, but I’m more optimistic looking forward to the next three months than I have been.’

Jonathan Gregory, investment partner at private equity firm Matrix Group, operates at the larger end of the lending market, typically seeking sums of £2 million to £10 million for company acquisitions. He believes that in this section of the market, conditions have started to get better.

‘Things have improved quite markedly. That is to say, getting finance six months ago was very hard, now it’s just hard. I think that’s partly due to pressure from the government. RBS and Lloyds were given all this money and told that they must lend.

‘There’s going to be a continuing relaxation in bank lending. One policy statement of a bank that we were dealing with said they would not go below £10 million for investments, but now they are. I think conditions will improve as it becomes clearer what banks will and won’t do. There are certain sectors of the market where you’re not going to get investment no matter what your size,’ says Gregory.

Still recovering

Martin Upton, lecturer in finance for the Open University, says that it is necessary to look at the psychology of lending in order to understand banking behaviour. ‘After having had a bad experience, [banks] are looking at the areas where they have already lent, rather than new areas. They just don’t have the appetite for new business.

‘There are also regulatory developments they are having to deal with from the Financial Services Authority in terms of being required to have a greater amount of liquidity. They’re pressing the conservative button on lending and looking to widen margins where they can – consequently, there’s less money available for commercial business.’

Upton adds: ‘It won’t be until the banks have repaired their balance sheets that we will get a true picture of what lending conditions are.’

Nick Britton

Nick Britton

Nick was the Managing Editor for growthbusiness.co.uk when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...

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