Ask now if you need a bank loan

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Ask now if you need a bank loan

Those of a certain vintage will remember the late US comedian Bob Hope, who said, “a bank is a place that will lend you money if you can prove that you don’t need it.”

While he’s not wholly correct in his assertion, there have been worries over bank lending to SME firms for many years.

Back in 2009, at the peak of the financial crisis, the then chancellor, Alistair Darling, met the banks over concerns that they were either not lending or, if they were, charged rates that were well in excess of the 0.5% Bank of England base rate.

And it seems that little has changed in the intervening years.

A survey into bank lending, the Small Business Index, published in July by the Federation of Small Businesses (FSB), found that banks were “pulling up the drawbridge” in front of SMEs approaching them for funding. Just 9% of firms in Q1 2022 applied for bank lending, and of those, only 43% saw applications approved. Both figures are, say the FSB, historic lows.

The point was driven home by another one of the FSB’s findings, namely that only 19% of firms responding to the survey described the availability of credit as “good”.

Further, the FSB reported that 61% sought the traditional overdraft and/or loan products of those that applied for finance, but 25% applied for asset-based finance, such as invoice finance, and 7% sought funds through peer-to-peer platforms, while 5% tried crowdfunding.

Data from the Bank of England published in May shows that there’s more to the story. Its Money and Credit – March 2022 statistical release recorded that those non-financial businesses borrowed £1.2bn from banks in March (including overdrafts), compared to £3.8bn in February.

But – and this is an interesting comparison – the bank said that “the annual growth rate of borrowing by large businesses increased to 5% in March from 3.9% in February, the highest

annual growth rate since June 2020 (5.3%). But the annual growth rate of borrowing by SMEs fell to -5.1%.”

And the comparison in terms of interest rates charged is just as stark, with SMEs paying more. The bank noted that the average cost of new borrowing from banks “rose 64 basis points to an effective interest rate of 2.94% in March,” while the “effective interest rates on new loans to SMEs rose 38 basis points to 3.49% in March.” There are 100 basis points to one percent.

With economic trouble looming and rising rates, those needing any form of borrowing are advised to seek it out as soon as possible. The trade association for the banking and financial services, UK Finance, said at the end of May that a potential recession could very much affect the ability of firms to qualify for bank lending.

As Stephen Pegge, managing director of commercial finance at UK Finance, commented: “If you wait until the downturn has hit and find you are in urgent need of finance, it may be too late.”

It should be said at this point that UK Finance disputed the FSB’s finding that just 43% of applications for business lending were approved. In UK Finance’s view, the figure is nearer 75%. Regardless, the point is well made – lenders will become more cautious and more exacting as the economy worsens.

It’s understandable then that Pegge advises potential borrowers to “think ahead and act now to get a financial buffer to last the next year or two. That way, if you are asked to provide any additional information to support your application, you will have time to do so. And your business – and the financial position of your customers – will probably look in better shape.”

Ultimately, those thinking about borrowing should plan ahead by preparing a cash flow forecast, proving orders, putting up security, building a good credit history, and tidying up their bank statements by cutting expenditure. Also, applicants should consider using a broker to marry up applications with lenders that suit their needs.

A potential recession could very much affect the ability of firms to qualify for bank lending