The Forum of Private Business (FPB) is has highlighted a record drop in lending as the main reason behind the increase in company insolvencies in new figures recently published.
According to The Insolvency Service, there have been 5,055 compulsory and voluntary liquidations in England and Wales during the second quarter of 2009 – a 2.9% increase on the previous quarter and a 39.1% rise from the same quarter of 2008.
The latest data from the Bank of England shows that lending to small businesses dropped by £14.7 billion during the same period – the biggest slump since 1997, when the Bank’s records began. The rate of applications for finance under the Government’s Enterprise Finance Guarantee (EFG) has also fallen.
“A variety of factors are contributing to soaring insolvencies, but they all lead to the same major symptom – a lack of cash,” said FPB spokesperson Phil McCabe. “Some banking bodies are claiming that lending to small businesses has improved following the Government’s intervention, but our research has consistently shown that demand for finance is not being satisfied by the supply from lenders. When finance is available, it is often far too expensive.”
According to FPB’s latest Economic Downturn Panel (EDP) survey, compared to previous months a slight improvement in ‘bank support’ (still reported by just 12% of respondents) was offset by the vast majority seeing no improvement and18% experiencing a decline.
The average lending rate for overdrafts, at 6.6%, and the 6.4% rate for loans were both well above the 0.5% Bank of England base rate. Demands from banks for additional personal security also continued.
Mr McCabe added: “At the moment, we are seeing apparently viable businesses of a certain size or industry sector labeled as ‘high risk’ by some banks.
“We want a return to ‘relationship banking’ – creating strong links between businesses and lenders so that regional managers can judge lending risk accurately, on a case-by-case basis. It is time for a review of how the EFG scheme is being interpreted by banks.”
The EDP survey of FPB members found that an overwhelming 66% of respondents want to see more support from local bank managers who are less constrained by centralised rules.
In addition, 61% of the small business owners surveyed want banks to develop a greater understanding of small businesses.
Almost a third of respondents said that fears their business would be perceived as high risk had stopped them from accessing finance through the EFG.
FPB member Steve Harkin, director and sales manager of Coventry-based Saxon Oil has had no success in securing any form of EFG funding from his bank and says he is "furious" over the situation.
Mr Harkin blamed Saxon Oil's problems mainly on the attitude of an individual bank manager he was forced to deal with. However, he also believes a wider reluctance to lend to small businesses is plaguing the banks and putting countless SMEs out of business across the UK.
He said: "What makes it worse is that some of these banks are actually publicly-owned.
"We as taxpayers are shareholders and it's about time they pulled their socks up. They caused this and companies here in the West Midlands, where I am, are dying on their feet for want of credit and mine is one of them.
"If they don't act soon, what they will be doing [with the EFG] is passing us a life raft after we've drowned."