Business group contests banks’ view on lending

16 February 2010

A leading business organisation has questioned claims by the banks that business lending is in a healthy state.

Following a report published by the House of Commons Public Accounts Committee criticising bank lending levels, the banking sector responded by saying that where demand exists for business finance much of that demand is being met.

However, the Institute of Directors (IoD) has issued the findings of a survey that contradicts the banks' argument.

The IoD found that almost 60 per cent of those businesses that looked for finance last year were refused by their banks, and that one in five firms are funding their businesses with credit cards.

In the survey, which took in 1,045 directors, a quarter said that they had attempted to secure funding from the institutions that they banked with in 2009/10. Of this quarter, 57 per cent were turned down.

To make the situation worse, money promised by the government's Enterprise Finance Guarantee (EFG) is not reaching businesses, the IoD said. Four out of five firms (83 per cent) that were declined bank finance were also not offered information about the EFG and government funding.

According to the IoD, many businesses don't even bother approaching the banks for money any more. Some 20 per cent of firms that wanted additional capital in 2009/10 didn't investigate bank loans or overdrafts, assuming that they would be refused, burdened with disproportionately high costs or required to supply additional security.

The IoD reported that there has also been a shift in the overall balance of sources of business finance. In 2001, 45 per cent of IoD members were financing their businesses through bank loans, and 40 per cent through overdrafts. Today, only 28 per cent are doing so through bank loans, and 36 per cent through overdrafts. But one in five business are now, to some degree, relying on credit cards for finance.

Miles Templeman, the IoD's director general, commented: "The fact that over half of all businesses seeking finance last year were turned away by their banks is totally incompatible with the banking sector's position on the state of lending in the UK.

"But what is even more concerning is that that having been rejected, 83 per cent of businesses are not receiving information about the alternatives available to them, including the government's Enterprise Finance Guarantee."

Mr Templeman added: "It seems that more businesses are turning to forms of unsecured finance, such as credit cards to get them through their short-term spending needs.

"The low interest rates on credit card balance transfers may partially explain the increasing use of this form of finance, but any contraction in credit card finance could see significant price hikes, adding to the already grave difficulties that many businesses are having accessing funds."