SMEs, the small and medium businesses that have repeatedly been identified as the ‘life blood’ or ‘work horses’ of the UK economy are still on limited rations when it comes to cash flow. Analysts offer several reasons for this shortage, but most agree that it’s down to a reluctance on the part of banks to make timely and affordable interim loans to start-ups.
In 2010 the British Bankers Association (BBA) set up an organisation called the Business Finance Task Force to look into avenues by which lenders could help small businesses in the gloomy financial climate, and one of the results was an appeals process for SMEs that had been turned down for financing. In a report last week, former head of the CBI’s small business council Russell Griggs said the appeals process works the way it’s supposed to – if it’s implemented.
Griggs’ report indicated that the criteria banks are using to qualify loan applicants may be the reason they’re being turned down. He says lenders are relying too heavily on information from credit bureaus and not enough on direct communication with potential borrowers. In more than half of all applications for sums less than £25,000 that were denied, the reason given was credit scores.
It turns out that iffy credit scores are often irrelevant; Griggs cited one case where a start-up business operator had purchased a new car a few months prior to his loan application. He got a car loan through a finance broker, who ran numerous credit checks, and those checks showed up as negatives on his credit score, just because that’s how the computers are programmed to assess risk.
Griggs pointed out in the report that with 40% of rejected loan applications, the decision was reversed when the applicants took advantage of the independently monitored appeals process, but, he said, most SME owners are not even aware they have the option to appeal. Quite often the mistakes in evaluating credit-worthiness are due to lack of specific information which, once supplied, will change a negative decision in favor of the borrower.