Walesbusiness.org

Welsh SMEs aren't the only ones looking for money from our banks

WHEN Willie Sutton was asked in a court of law why he robbed banks, he replied: “Because that’s where the money is.”

And it would appear that is where it is likely to stay, despite the best efforts of bodies such as the Monetary Policy Committee recently pumping a further £75bn through their doors through quantitative easing.

For a new company, the relationship with its bank can be a make-or-break issue. But only since the near-collapse of our financial infrastructure have we actually begun take a closer interest in the activities and standards of those holding the keys to the future development of business.

So are our banks becoming fairer, more accountable and transparent in their dealing with businesses? There are certainly worrying signs that demands for higher levels of personal collateral may be creating another hurdle for wary entrepreneurs.

Don Cruikshank’s independent report into banks in March 2000 found that small- and medium-sized companies were being overcharged to the tune of £750 million a year. His group of experts concluded – amongst many other criticisms – that banks also operated within a series of complex anti-competitive monopolies, and that they pushed businesses towards borrowing instead of encouraging the wider use of equity.

Even back then, businesses constantly hinted that bank charges were routinely set at the higher end of the spectrum, waiting for individual business customers to squeal before making reductions. It’s obvious the mainstream banking sector felt no threat from competition.

The key finding of Cruickshank was that, where services for businesses were concerned, the banks were guilty of the sort of anti-competitive practices that would attract legal action in the USA and many other countries.

As a result, the Office of Fair Trading recommended that banks pay interest on positive balances and, in order to increase competition in the business banking arena, make it easier for customers to move their accounts to other banks. They also recommended that banks make more of an effort to clarify the different services that they offered to businesses.

Fast forward eight years and, even before the collapse of Lehman Brothers which signalled the start of the world’s worst financial crisis in history (Mervyn King’s words), it has been, of course, debatable how successfully banks have fared in providing clearer, more transparent information about interest rates and overdraft and transmission charges.

What is interesting to observe, however, is the changing nature of the collateral that banks require when establishing finance with their customers. It appears that more and more banks are looking for higher levels of ‘personal’ collateral than in the past.

This is a negative development, as who wants to put both their home and business at risk when seeking finance to take the business further? This is a worrying trend as for too long the UK has been perceived as being risk-averse when it comes to entrepreneurship.

The move towards personal collateral will do little to encourage Welsh entrepreneurs to be dynamic in their plans for establishing or expanding businesses.

Perhaps unsurprisingly the main area where the banks continue to fall down is in providing ‘competitive charges’ and interest rates. It is a fact that businesses in general still feel they are paying too much for the most basic of services.

The fact is that businesses need to be more willing to hawk their custom around. People very rarely change banks – there is an amazing inertia amongst customers. The moral for businesses is that regular shopping and haggling for bank services is better than lifetime loyalty.

As the SME sector in the UK represents nearly four million businesses, who between them employ 55%t of the UK’s workforce, and provide approximately 50% of all business turnover and create economic activity valued at around £1 trillion a year, the importance re-establishing an effective working relationship between SMEs and their banks cannot be stressed too strongly if we are to realistically turn around our ailing economy.