Banks and Business: Time to Renew the Marriage Vows for Jobs

Here is a simple truth: There would be more jobs if there were a better understanding between banks and the businesses that want to borrow from them. But this appears to be lacking, according to new research...

Here is a simple truth: There would be more jobs if there were a better understanding between banks and the businesses that want to borrow from them. But this appears to be lacking, according to new research.

We sometimes forget that it is not just mighty corporations with interesting tax arrangements that provide work. More than 14.1 million people are employed in small and medium sized companies (or SMEs, as they are invariably known) in the UK.

It is these businesses, from pie makers to precision engineers, that underpin communities in a way that the global giants rarely do. Their smaller cousins provide the jobs and services that glue the country together. When smaller businesses want to grow and recruit more people, they often need banks to fund that expansion.

Yet there is a suspicion, fuelled by headlines and political unease, that despite a plethora of welcome Government initiatives to encourage lending, banks and smaller businesses are not always talking to each other, let alone engaged or married.

We commissioned an independent study by the business schools at the Universities of Surrey and Greenwich to find out what is really going on, and why the money is not always getting to where it's needed. Researchers interviewed SMEs involved with everything from hairdressing to wearable wireless body sensors. They also talked to key decision makers in five of the UK's high street banks.

The results were troubling.

On the plus side, most businesses applying for loans actually get them - 74 per cent, in fact. But that is still down from the 90 per cent that did so before the banking crisis of 2008.

However, 26 per cent of SMEs that want money cannot get it. This is far too high.

The business school authors put the barriers to SME lending down to a lack of effective communication, with each side lost in translation to the other.

The research showed that businesses don't appreciate the risks banks take or understand the regulatory burdens that they face. It is not like taking money from an investor or friend.

They often fail to recognise that banks want to share risk, not shoulder it. Owners need to show a good credit rating, prepare realistic business plans and seek some expert feedback before approaching a lender. Instead, many treat borrowing money as if it were a 'Dragon's Den' pitch where decisions are made on gut instinct - a virtue in entrepreneurs, perhaps, but a vice in bankers.

Equally, banks need to be more candid about their loan criteria and provide feedback when they turn someone down. It would help if websites offered a clear checklist of what they want to see in an application, not to mention adding a real human into the mix to help the process.

The government could also do more, particularly in sorting out the conflicting pressures on banks being expected to lend out money whilst also building up their own reserves.

The state-backed Business Bank should help those firms currently struggling to get finance when it finally gets going, as long as it addresses this disconnect.

But it will not help the perception that our research found and its damaging implications for jobs.

Banks need to make more effort to be more accessible to businesses, which in turn need to think harder about what banks want to see. It matters. We should remember that most SMEs pay their taxes in the UK. All of their taxes. Banks and businesses need to get their relationship back on track again. This is not a marriage anyone can afford to see fail.

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