THE BLOG
25/07/2012 08:27 BST | Updated 23/09/2012 06:12 BST

Why the Issue of Access to Finance Requires a More Sophisticated Solution that Banker-Bashing

If you ask any small business to list the issues that most affect its daily activity, you would get very short odds on at least part of the answer being access to finance. Over the last five years, banks have been vilified both for lending too frivolously and too modestly - quite an achievement, even for a banker.

If you ask any small business to list the issues that most affect its daily activity, you would get very short odds on at least part of the answer being access to finance. Over the last five years, banks have been vilified both for lending too frivolously and too modestly - quite an achievement, even for a banker.

The trouble is, that both of those things are actually true.

To set this in a little context, in the wake of the financial crisis, banks have been ordered to curb 'risky' lending and restore their balance sheets, largely by building up capital buffers to protect against future losses - on balance, a reasonable request.

Simultaneously, Project Merlin, set up by Chancellor George Osborne, imposed lending targets on the banks - about £190bn to businesses during 2011 - including £76bn to small firms.

One could well conclude then, that banks are facing an impossible task, being asked, as they are, to both lend more and save more.

The charge that banks lent too frivolously than one might deem appropriate prior to 2007, is not quite as simple as it first seems. Yes, lending standards were significantly lower than they are now - this was undoubtedly a key driver of demand for lending - something I will return to later.

Yet in this context, we must say two things. Firstly, many businesses and households could and still can afford the repayments on such debt - is it really the job of a bank to deny credit to someone that can afford it? No matter that this has clearly impacted upon consumer spending post 2007 - that choice belongs to the consumer does it not?

Secondly, blaming the banks entirely, for lending to those that can no longer afford the repayments, is like blaming the gun shop for selling to a murderer. Is the shop owner responsible? Yes, in part of course, but they didn't pull the trigger.

Why did consumers and businesses accept such finance if they couldn't afford the repayments? The answer, is that this behaviour is yet another manifestation of the poor quality of financial education in the UK, both in schools and at home.

That is why my organisation has created Finance Your Future, a series of work-booklets put into schools across the UK, that teach young people how to manage their money effectively.

So, moving back to the present, I pose the following question - to what extent are the banks responsible for the lack of finance available to business? Firstly, pre-recession demand was inevitably significantly boosted by the favourable terms on offer.

Second, the financial literacy of some business owners is undoubtedly lacking - a good proportion of cases presented to banks are woefully lacking in detail.

But to answer such a question with completeness, I must refer to my own experience. Last summer (2011), I sought business finance from my bank. Having just completed my business plan for the year ahead, I realised that my expansion plans would require an overdraft facility to cover a 3 month period of negative cash flow. Hence, I approached my 'relationship manager' with my full business plan and relevant financials. After an initial (online) enquiry, I waited for 4 weeks for a response from said individual.

4 weeks

A mumbled voicemail message, promptly replied to, I waited a further 2 weeks for a real conversation. Except this wasn't really a real conversation. My personal relationship manager was based in a call centre on the other side of the UK! Worse still, having clearly read none of the material I had sent to him, he asked why the business revenues were depressed during August. Clearly, the fact that we mainly supply to schools and colleges was lost on him! (If he happens to be reading this - schools are on holiday during August!)

After a further grumble along the lines of "I'll get back to you", I waited yet another month for a response, which, almost inevitably, was a flat "no" - I hadn't even formally applied for the finance.

Let's be clear here, this is a business that, at the time, was running a 62% NET profit margin - i.e. profit after tax was greater than all costs incurred!!

As if to illustrate this, I, rather disgruntled of course, promptly visited the local branch of another major bank, met my new local relationship manager - in person - and promptly received the overdraft within a week.

It could not have been a more different experience and sums up the accusations levelled at banks rather neatly - a good number are rather unfounded and unintelligible, the rest are perfectly legitimate.

Access to finance is critical for businesses large and small, particularly if they, like my own organisation, are looking to grow.

Readily available finance for exports is also absolutely critical if the UK is to meet its bold export target of 25% of GDP and sometimes, appropriate finance might just save some jobs.

All this, means that the recent schemes announced by the Treasury and Bank of England aimed at freeing up finance for business come at a critical time. Clearly, it is far too early to establish their effectiveness, but at least it tells us one thing - finally, at long last, the Government may have realised that the issue of access to finance requires a more sophisticated solution than banker-bashing.