When Patrick Nelson received an e-mail from Barclays on September 8, he had no
reason to suspect anything untoward.
Nelson, the 39-year-old founder of the Nottingham-based website developer
Underdesign, had a good relationship with his bank manager. The pair often
rounded off networking events with a quiet beer together.
A fortnight earlier, Nelson had helped Barclays drum up more business by
sending a round-robin e-mail to his contacts. “His [the bank manager’s]
service is the best I’ve had so far,” he wrote.
The e-mail that Nelson now received from Barclays was short and to the point.
“I thought I’d drop you an e-mail to see if you have received the paperwork
to restructure your business overdraft? Please can you let me know?” it said.
Three days before, Nelson had received a letter suggesting that he pay off his
£8,000 debt by taking out a further loan. Within three weeks, his overdraft
had been cut to £2,000 after an account review meeting that he was not
invited to attend. “If we survive the recession it won’t be thanks to
Barclays, it will be in spite of it,” said Nelson this weekend.
Underdesign’s plight is not uncommon. There is deep concern about the
behaviour of banks across the small-business community, which employs 13.5m
people and accounts for about 60% of the private sector. An estimated 40
small firms are going under every day because of dwindling orders and a lack
of finance.
Alistair Darling, the chancellor, and Lord Mandelson, the business secretary,
summoned banking bosses last Thursday to press them to free up lending.
After the £37 billion banking bailout, designed to stabilise Britain’s
creaking financial system, they wanted to know why lenders weren’t keeping
their side of the bargain and backing enterprises struggling for survival as
the economy slides.
Instead of offering every small company the cushion that the politicians
wanted, the banks are taking a tough line that promises to deepen the
recession and not protect against it. Experts predict that more companies
will collapse and more jobs will be lost as a direct result of lenders
toughening up.
“The problem was that the banks were too generous in the past,” said Neil
Cooper, a restructuring partner at Kroll, the consultancy. “Companies that
should have been allowed to go to the wall or restructured in some way just
went to the bank and borrowed more money. They bought these lifebelts but
they will only work if there are no waves in the sea.”
Rather than failing, Patrick Nelson’s three-year-old business was prospering,
with turnover forecast to reach £200,000 this year. However, like thousands
of small firms, his overdraft covered the gap between money paid out and
money from customers coming in.
Without that facility, he has shelved plans to add a fifth web developer to
his team of four and he has begun demanding larger deposits from customers.
“Before, we could be flexible and support small businesses like ourselves but
now that’s impossible,” said Nelson.
Simon Lowe’s adventure-travel publishing firm Know the Score Books is also
struggling to stay on an even keel. Suppliers are taking longer than ever to
settle their bills. Experian, the credit-report group, has found that large
firms are taking 88 days to pay an invoice from smaller suppliers, a week
longer than in June.
Lowe had to threaten one large company with legal action before it settled an
eight-month-old invoice. His bank has been less than sympathetic,
withdrawing a same-day cheque clearing service and calling in his £9,000
overdraft by the year-end.
“I know other companies that have not been so lucky,” said Lowe. “Their
facilities have been called in straight away and they are having to sell
personal assets, like second cars, to pay them off.”
Another company, which declined to be identified, has been presented with a
stark choice by HBOS: either shareholders must stump up more equity, or it
must “rebank” - the current euphemism for taking its business elsewhere.
While it decides, its lender has warned that factoring - the process of
borrowing against invoices it is waiting to have settled - will decline from
80% of the face value by one percentage point a week.
Instead of paying off debts, Simon Du Boulay is struggling to raise £250,000
to expand his seven-year-old Telford business Aerosport, which sells sports
aircraft and flying lessons and turns over £1m a year.
After two months of trying, his plans to move out of the microlight market by
buying some new French-made two-seaters can’t get off the ground.
“We’re trying to raise the money through the Small Firms Loan Guarantee
Scheme, which would mean the government guarantees 75% of the loan,” said Du
Boulay, who remortgaged his house to set up the business. “The banks only
have to stump up 25% but they won’t even look at me.”
Andrew Davidson is also worried. He is managing director of Livewire Group, an
incubator for digital ventures in Liverpool, including the city’s annual
Sound City music festival.
Davidson fears that some of the 14 companies in his £3m portfolio will fail if
they can’t get their hands on cash. In the past six weeks, discussions to
borrow £150,000 for one of his investor firms have deteriorated. Its bank is
prepared to lend £75,000 - and only then if shareholders stump up another
£75,000 themselves.
“The subtext is they don’t want to lend you money, but they don’t want to tell
you that,” said Davidson.
ON Thursday morning, Britain’s bank bosses were summoned to the Treasury for
their latest meeting with Darling, Mandelson and Lady Vadera, undersecretary
for business.
It had been billed as the showdown between government and the banks over
small-business lending, but the reality was far less combative. Three topics
were discussed - the general banking environment, repossessions and the
banks’ dealings with small businesses.
Britain’s big banks continue to protest that they are still lending to the
real economy. The British Bankers’ Association (BBA) has said that in the
year to June the value of business loans extended by its members increased
by 11% to £44 billion, while overdrafts grew 3% to £9.2 billion.
Mandelson agreed with their prognosis. He said he was sure that for every
company complaining in public about its treatment by the banks there were
probably 10 firms that didn’t have a problem.
“We wanted Mandelson to say get over it and get on with it,” said Stephen
Alambritis of the Federation of Small Businesses. “The statement from the
BBA saying there would be casualties sent out the wrong signal for us. We
have to press our case hard.”
The federation is calling for a £1 billion small-business survival fund, with
money partly coming from Europe, to support the UK’s 4.7m small firms.
A summit will be held between the small-business lobby groups and all the
large banks to find out what more can be done. For the three banks destined
to end up with large government shareholdings - Royal Bank of Scotland, HBOS
and Lloyds TSB - Mandelson and Darling warned there would be separate
discussions over support plans for small business.
It sounds encouraging, but there are two problems with the BBA’s figures.
First, the real tightening of credit reported by business has taken place
since June. Second, the numbers look good because they are being pumped up
by cash-hungry businesses drawing down all their existing credit facilities
while they still can.
“If you are a business with a revolving credit facility or a sizeable
overdraft or some kind of working capital facility you will most probably
have been drawing all of that capital in the past few weeks,” said one
corporate-restructuring partner from a big four accountancy firm. “It is
only sensible to get your hands on cash that you are contractually entitled
to.”
Barclays insists it has lent more in 2008 than in 2007, with 22,500 loans
totalling £3.5 billion advanced to small firms.
“I have an appetite to continue to lend at that level,” said Steve Cooper,
the managing director of local business at Barclays. “Our approval rate
remains at about 80%. In that respect it is business as usual.”
What has changed is the cost of borrowing and the deteriorating economic
environment.
“We are mindful of being flexible and responsible for all parties,” added
Cooper. “I haven’t seen any examples at Barclays of people having the rug
pulled from under their feet.”
The mismatch occurs because the agreement struck between the banks and the
government is not as clean-cut as the voting public believes.
For the next three years, RBS, Lloyds TSB and HBOS - the three banks being
part-nationalised - have committed themselves to making the same level of
credit “available” to homeowners and small businesses as they did in 2007,
according to the Treasury. It sounds good, but the reality may be much
bleaker.
“We have agreed to make credit available to the market, but we will only lend
that money if it makes sense for us to do so,” said one senior banker close
to the bailout negotiations. “We are not going to start lending money to
customers who we don’t think will be able to pay it back. That would mean we
were lending irresponsibly, which is not what the government wants at all.”
Treasury sources confirm this interpretation. To match their end of the
bargain, the participating banks need only tell the government that they are
willing to lend a certain amount of money to small businesses and a certain
amount to homeowners.
If they can’t find customers that match their ever more strict lending
criteria, there will be no pressure to lend money. So as the recession
bites, banks will still be pulling the plug on businesses - bailout or no
bailout.
Even if the government wanted to force the hand of the banks, its power to do
so is limited. The government stakes in Britain’s banks will be held through
a newly created quango, which will be staffed by independent executives who
have yet to be appointed.
While there will be new directors appointed to the bank boards to represent
government interests, it is up to the banks to find suitable candidates.
Sources close to all the banks involved in the scheme claim that they are
still in the dark on how these new directors will operate.
Vadera has said that she will demand a report from each of the banks once a
year detailing exactly how much they have lent to each segment of the
business community and what charges have been levied. It will be the most
comprehensive effort to bring transparency to business lending, but it seems
unlikely to be enough to force the issue.
That doesn’t mean the government’s scheme won’t work. The idea behind the
bailout is that once the banks have been stabilised, the money markets
should begin to reopen and money will gradually trickle down to the
companies that need it.
The problem is when. Unless banks heed the government’s calls for leniency,
thousands of businesses are likely to have gone bust, making unemployment
even worse. Lenders are braced for some tough talking.
“Small and medium-sized companies are harder to restructure than
private-equity firms or bigger companies that are more used to the rough and
tumble of the financial world,” said the head of the turnaround unit at one
of Britain’s biggest banks.
“You are dealing with three or four people whose whole life is wrapped up in
the company. Trying to tell someone like this that an outsider could run the
business better is hard.”
MONEY WORRIES are not confined to Britain’s small firms. Cheap lines of credit
agreed before the credit crunch have dried up for the larger, listed
companies too.
Arthur Millholland has presided over a plunge in the share price of Oilexco, a
£450m North Sea oil producer he runs. For eight months he has been trying to
refinance its debt with a syndicate of 11 banks led by Royal Bank of
Scotland. The terms he has been offered are too onerous to accept.
“The true cost of capital on the street will shock you: five to six percentage
points over Libor [the rate at which banks lend to each other] and higher is
common,” he said. “Once you put fees in there, and taking into account
currency fluctuations, you get to about 20% of the principal. It’s
staggering,” he said.
Last month, the directories publisher Yell renegotiated the covenants on its
£3.7 billion debt pile, raising its effective interest rate from 7% to 8% at
an extra cost of £25m a year.
A string of large companies have yet to begin refinancing negotiations but
face a tough time when they do. In the leisure sector alone, JD Wetherspoon,
the pubs group, and bookmakers William Hill and Ladbrokes must refinance
next year or at the start of 2010.
Nigel Parson at Evolution Securities thinks Wetherspoon has the highest
financing risk and “little room for manoeuvre”. It must refinance 17% of its
borrowing facility next year and 95% of subsequent facilities in 2010.
“Even creditworthy borrowers with no trading problems will struggle to
refinance unless lenders are supportive,” said Neill Thomas, KPMG’s head of
debt advisory. “We all have an obligation to ensure good companies do not
fail because of market illiquidity.”
Such negotiations are taking place against the backdrop of a worsening
economy. Friday’s announcement that Britain’s gross domestic product had
contracted by 0.5% in the last quarter confirmed that the economy is heading
into recession.
All three of the main sectors of the economy were weak, with manufacturing
down 1%, construction falling 0.8% and the service sector 0.4%.
Manufacturing and construction are formally in recession, having declined by
two consecutive quarters.
“While it is important not to talk ourselves into a slump, urgent steps are
needed to alleviate the worst consequences,” said David Kern, economic
adviser to the British Chambers of Commerce. “Interest rates will have to be
cut to 4% in November, and to 3.5% soon after. Business taxes will have to
be cut in the prebudget report and the government will have to insist that
the vital flow of bank finance to small firms is maintained,” he said.
Survey results from the CBI, the employers’ organisation, last week showed
that UK manufacturing orders fell at their fastest rate for nine years in
the latest three months and that business confidence was at its weakest for
28 years.
Ian McCafferty, the CBI’s chief economic adviser, said: “It is of serious
concern that constraints on capital now appear to be affecting manufacturers
in a way that had not been the case earlier.
“We can but hope that the recapitalisation of banks and the cut in interest
rates, which took place just as the survey closed, will prevent a further
credit squeeze over the winter.”
The CBI expects the pace of job losses to increase, with 23,000 manufacturing
jobs lost in the third quarter, rising to 42,000 in the fourth quarter.
The Forum of Private Business is gloomier still. In the worst-case scenario,
it predicts that 200,000 companies could go under during this recession -
many of them because bank financing is not being made available quickly
enough.
“We are only at the front of edge of the wave now,” said Neil Cooper at Kroll.
“There is far, far worse to come.”
