Tuesday, 17 July 2012

Solving the problem of banks lending to small businesses

I suspect that, like me, you listened to the recent announcement that the Government was going to arrange to lend cheap money to the major banks on the condition that it be loaned on to businesses with just a hint of cynicism.  We now have more detail and I am not surprised to hear that it is not quite as announced – what headline ever conveys an accurate representation of the content!

Leaving aside the Government’s definition of a small business – i.e. a business with a turnover of less than £10M and less than 50 employees – it would now appear that people who have mortgages are equally as important and therefore cheap mortgages are also included.  Put yourself in the position of a bank which has the chance of cheap Government money if it lends to either a small business or a small potential homeowner.

In the first instance you are depending on judging whether someone has a good business plan, a solvent business and an excellent reason for wanting the money – but nothing else in the way of assets.  In the case of the possible homeowner you can set the entry level as far as the deposit is concerned and thereby the percentage of the total value of the house at what you might regard as a reasonable level – commonly 25% (thus a 75% mortgage to value).  What this means of course is that you collect mortgage payments against this in the hope that the mortgagee’s circumstances do not change; if they do and they can no longer afford the payments you then repossess the property and put it up for auction with a reserve of 75% of what it is worth because that is all you need to cover your loan.

Where would you lend the money?

So let’s not be negative about lending to businesses, let’s be positive and not just knock the Government but offer an alternative.

The main reason the banks will not lend is because of the situation above.  There is not as much security lending to a small business and therefore they might lose their money.  In view of all the criticism they have had in the past about bad debts they are wary of incurring more, so, better safe than sorry, no lending without assets to back it so we can recover our money.

Why doesn’t the Government, instead of printing money to lend cheaply to banks where the best bet is that it will help the building industry, just say, lend if you think the business is properly run and has a good business plan and, if it goes wrong we will not blame you for lending the money and will make the deficit good.  The Government then becomes the small businesses’ security.  I am not saying that they can just give out the money without looking at the proposition properly and they would have to prove they had done so to get a BIS refund but we need innovative thinking if we are going to solve this problem.

What do you think? 


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