A Valuable Contribution To The Small Business Lending Debate
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A valuable contribution to the small business lending debate
I’ve just finished reading the excellent submission by Will Hutton and Paul Nightingale to the Independent Commission on Banking (ICB) on behalf of the Work Foundation. Anyone interested in small business lending should read this concise report, which contains the most coherent and factual argument for bank ‘ringfencing’ I’ve read (for example, I was fascinated to read that specialist SME bank Handelsbanken operates profitably in the UK with a 17% capital ratio, and that doubling capital ratios would be expected to increase bank funding costs by just 0.1%~0.4%, both of which cast doubt on claims that ‘ringfencing’ will make small business lending prohibitive).
Also interesting is the overview of current bank risk management practices for small business loans, where the report notes that “because SMEs are so different, the risk associated with SME lending is less easily turned into mathematical models” yet “expensive upfront investment in relationship building and detailed credit assessment is also problematic” as small firms are “too small to merit the investment in time and effort”; more controversial is the claim that “when the mathematical models underpinning lending to SMEs broke down in the recessions, banks lacked the ability to analyse individual firms and resorted to absolute rationing.”
The Work Foundation’s report is – by its own admission – “tentative”, having been prepared to meet the deadlines for the ICB recommendations earlier this month, and a more detailed report is being prepared by the end of this year, which I’ll certainly be reading. One area I’d like to see covered in more detail is the challenge created by the quality of some small business loan requests (for example, the recent SME Finance Monitor reported that just 1 in 5 SMEs sought external advice before applying for a bank loan, and less than 1 in 3 have a written business plan), which undoubtedly hinders some small firms’ access to finance. This is something that we at FundingOptions – and we hope government and industry leaders – will be trying to tackle.
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