Despite an increase in small business lending, the UK banking sector is still not providing the services that small businesses need to grow and prosper. Recurrent problems include a lack of appropriate advice for small business owners, banking procedures that are overly complex and time-consuming, and a continued squeeze on credit.
While it’s important for UK banks to avoid the kind of risk-taking that contributed to the financial meltdown, they could still do far more to help small business owners make the right choices.
Start-ups and entrepreneurs with little experience of managing finances certainly need more support and better advice from their bank managers. For example, banks could help small businesses by providing information about the wide range of financing sources available, such as factoring, invoice financing and PO financing, as well as equity finance and peer-to-peer lending options. These alternative forms of finance can assist small companies facing cash flow problems but businesses need to make careful calculations before choosing.
Practical Advice for SMEs
The type of business advice typically doled out by bank managers is rarely hands-on and practical enough for the needs of most small business owners.
For example, learning how to move money between accounts to avoid banking fees or overdraft charges would be of more benefit to customers than discussing online marketing strategies. Banking fees for small business owners are also unnecessarily complicated and hard to understand. Instead of helping new entrepreneurs find ways to save money, a lack of transparency over charges often makes matters worse.
In addition to being complex, banking procedures often take far too long. Even opening a business bank account, setting up online services and getting a debit card can be a lengthy process involving unnecessarily large amounts of paperwork. Loan applications are even worse, often drawn out for weeks on end due to form-filling requirements. After jumping through an endless series of hoops, many entrepreneurs still end up getting rejected. As such, it’s little wonder that so many are seeking business finance from alternative lending institutions and by-passing their banks altogether.
Capital Requirement Rules
Strict capital requirement rules can also be blamed for stifling business lending by banks. Because lending to SMEs is considered more risky, higher capital is required to guard against bad loans. This results in banks generating too much lending in the mortgage market and not enough in the small business sector. Business secretary Vince Cable has called for more proportionate regulatory requirements that would help to boost bank lending to SMEs. Cable has already set up a business bank that has loaned £780m to SMEs in the UK. A plan to use government funds to underwrite SME lending by commercial banks would enable them to loan far more with the same capital buffer.
Cable recently described domestic banking business services outside the capital as “primitive” and a far cry from the sophisticated technology used in the finance district. Speaking to bankers last month, Cable said: “We do have a very underdeveloped, unsatisfactory system of business financing in the U.K., particularly in the small-medium-sized end, alongside some of the world’s most sophisticated institutions, and that is a problem.” The business secretary wants to increase competition through the creation of new British banks and financial institutions.
While it’s clearly not all the fault of the banks, business banking services for SMEs could be greatly improved through increased competition, greater transparency and more practical advice for start-ups and entrepreneurs.