Emerging / People

STOP PRESS: Why bank lending is forcing businesses to close – including ours

Article written by

James Matthews-Paul

Written on 25/02/2015 | Posted 2 years 11 months 25 days ago

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Four and a half years ago I launched a business that would fill a gap in the trade media and provide jobs to four under-30s who, otherwise, wouldn't have one. From a standing start we made a thin but credible profit in each of our first three years. Proudly, we turned to Barclays to discuss lending options. There began the start of the end of my business.

We're often told how amazing it is that we have made it this far, given that more than half of all businesses fail by the end of their third year. The money we required was to recruit a salesperson and redevelop the website, creating new but vital revenue streams by introducing targeted advertising and subscriptions. By this stage we had bartered for office space on Fleet Street and were ready to surge forward: we had the team, the vision and the visibility to make a go of it.

But instead of lending to us, Barclays turned us away. Actually, they demanded that we rewrite the business plan five times, on each occasion providing a different excuse for why they wouldn't extend a loan to us. I, as a director, do not own security. We are not a manufacturing business. I didn't conform with the requirements of the Enterprise Finance Guarantee; I don't have a good enough credit rating. Finally, and most insultingly, was the accusation that we had not reinvested enough money into the business: that the £10,000 'paper profit' we had made, effectively the only money I could draw as a director, and that my time, sweat and toil to create a business and jobs out of nowhere was simply not worth remunerating.

We have trodden water ever since, trying everything we can to keep moving forward: new sales initiatives, alternative lenders, drastic decisions. Having lost various windows of opportunity we were forced to take calculated risks; resultantly, the small financial hole I had predicted has only widened due to our inability to secure vital funding when we needed it. Now, staring down the barrel of a gun I have tried to shoot in every other direction, I must acknowledge that, barring a miracle, we must fold on Friday.

We are not alone – except we are

It requires only scant research to realise that too many businesses find themselves in our position, and that the government's commitment to us over the last five years has been hollow to the point of disingenuous. Despite Cameron, Cable and others directing banks to lend to entrepreneurs, a KMPG report in September last year showed that SME and individual lending had decreased by 14 percent over the last five years, representing £309 billion that is no longer available. HM Treasury's own documents show the rejection rate for first time business borrowers is 50 percent.

That goes some way to explaining why, according to a report by insurance group RSA in the Daily Mail, less than half of all new businesses started since 2006 have made it to their fifth birthday. Those who launched in the recession fare worse; a quarter of 2008 launchers failed before the terrible twos, and 14 percent of 2010 start-ups – the same vintage as Output – didn't make it past twelve months.

Most revealing, however, is the research undertaken by the Office for National Statistics into business demography. Published in November 2014, it revealed that, of those companies born in 2010, only 57.1 percent make it to the three-year mark – with prospects looking grim over a five-year period. From the 2008 start-up pack, only 41.3 percent made it to 2013.

This can be attributed to a lack of credit, but also to the withdrawal of vital support services and the announcement of pyrrhic initiatives. Consider the British Business Bank: it does not help small businesses directly, but instead provides government-backed cash to lenders who will, or are supposed to. These include the major banks, who account for some 80 percent of all UK financial relationships, as well as alternative lenders, such as Funding Circle. It claims to have 'supported' £829 million of loans for 35,000 businesses as at November 2014; specifically its Start Up Loans programme had provided £130 million to 25,000 businesses by January this year. The figures don't correlate directly, but we can surmise that the remaining £700 million was divvied up between around 10,000 businesses, mostly via traditional channels.

Refusal with no recourse

That barely scratches the surface when we consider the number of businesses refused lending, and the rate of business death. It also hints at the self-defeating circle that now constricts the average British entrepreneur. They start a business, often from a vision for how something can be done better, or because – during recession – they aren't able to find employment. These are often people who, like me, don't have money in the family, or any physical collateral for security. They grow their business, steering it past the opening phases and making it to the three-year point, unlike half of all their peers, but, at the crucial moment, roughly half of them will be turned away.

37 percent of these people will give up their search, and possibly their dreams, there and then. In only six percent of all cases are they directed to other sources of finance by the rejecting bank, while only 11 percent are offered alternative funding or advice. Although there are no statistics on the matter, I'd wager that very few of those rejected will be aware that they can appeal via the Better Business Finance website, despite the fact that its independent appeals reviewer, Professor Russel Griggs, ruled in favour of 254 out of 965 he received in Q1 2014-15, according to The Independent. That means that, in more one in four cases, the banks had 'made the wrong decision on the basis of the criteria agreed by the sector'.

The full impact this ever-tightening snake is in the creation and building of assets. As we have been told repeatedly – by Barclays, Funding Circle, ASC Finance officially and dozens of others unofficially – the only way to secure credit and assure a lender of serviceability is to own assets, either personally or within the business. But companies like mine – those in the service sector, representing 73 percent of all in the UK – do not build such assets easily, and certainly not in their first three years of operation. And people like me, aged between 18 and 35, are less likely than other generations to have the collateral against which a loan can be secured. Even alternative lenders – and I single out Funding Circle for refusing me twice on the same point – use assets as their main criterion. It is impossible to create wealth unless you have wealth already.

With lending shrinking, alternative finance not signposted, advice withdrawn (consider the closure of Business Link), the major banks failing to lend according to the rules and the Gordian knot of asset-based criteria, it's easy to understand why business failure rates are so high – and to see the stress and misery this inflicts on those who are supposed, as Cameron said in 2012, to be 'the lifeblood of the British economy'.

 

The human impact

This lifeblood, though, is anaemic. Nothing, in my experience, is as terrifying as the prospect of failure: of the impact it will have on the people that work for and with me, and on their livelihoods, their ability to pay their rent. I was the one crying on Monday as I told my two employees, incredibly talented individuals at the birth of their careers, that the business must close on Friday. They were the ones that held my hands and told me we would go down fighting.

Curiously, it's easier to live with the consequences for one's self, however debilitating. For me that includes two major stress-related health incidents, each of which occurred around Christmas and led to enforced bed rest for more than one month. I have lost a sixth of my body weight in two years – at 5'11" I now count a little over nine stone – and am in debt to friends and family, none of whom has the money but has done what they can to help me pay my rent, and eat. They've done so knowing that, apart from illness, I've taken seven days' holiday in the past two years, mostly on the insistence of my staff. I can't claim it has caused my natural proneness to depression but I can assert that it certainly hasn't helped.

We start businesses for a variety of reasons, from necessity to opportunity, wealth or job creation to a simple vision of making things better for people or organisations. In my case, it was a combination of them all. Four years ago I had an idea to provide a better editorial voice for the creative visual communications sector, offering new promotional opportunities and an information service for this industry. We have been continually lauded for our efforts by small businesses, vendors, organisations and manufacturers. We have become the 'challenger brand', according to one PR specialist, furthering important agendas, regularly beating all competitors world-wide to be first out with the story, and now notorious for talking about the issues that others won't.

But the initial plan was much broader, and I almost laugh now as I consider it: to use print-on-demand technology to change the way that we publish information. When we rewrote our business plan in January 2014 at the behest of Barclays, it demonstrated that our partners for this project included some of the world's largest and most exciting technology companies, and that we were uniquely positioned to bring them together to bring publishing in line with the needs of the modern reader. Instead, we were told that 'print and publishing are dead', belittling everything we have built and the vast, vibrant sector it hoped to change. Our figures, based on creating sustainable promotional opportunities for vendors across print, digital and manufacturing, were summarily ignored. Even our excellent bank manager – who has fought our corner every step of the way – and his protestations on our behalf were dismissed. The computer said no and it would not budge.

Quite apart from this are the initiatives we will never launch, or be able to further. We won't be able to address the massive skills gap faced in the UK graphic communications sector or, ironically, the effect in this industry on a lack of small business funding. We will have to stop being the main provider of high-quality video content; we will no longer be the voice of the communications sector.

David Cameron has made two speeches to the Conservative party conference regarding small business lending during his tenure. In 2010 he 'made it clear' that the banks owed a debt to the people. "Taxpayers bailed you out. Now it's time for you to repay the favour and start lending to Britain's small businesses." Then, one year later, there was this:

"There is only one strategy for growth we can have now," said the Prime Minister. "That is rolling up our sleeves, and doing everything possible for people to start a business, to grow a business, to invest in a business and to take people on."

This 'strategy for growth' has not worked. The banks are not lending. Support is not there for businesses that need to grow, and the numbers show that failure has not slowed. Unless they are already independently wealthy, or have private backing from their partners, friends or family, entrepreneurs with good track records will fail, or keep trying until they are in an even worse position. They will make themselves ill, and they will make others redundant. The money they owe to suppliers and creditors will disappear, causing even more trouble. In short, they won't pull us through this economic crisis: quite simply, they cannot.

 

From the banks' apathy to my anger

As I mull over the only step remaining in my field of vision, I reflect on the awful decision that I must make in 48 hours' time. I look at Ben, Dara and our ops manager Annie and realise that I am about to pull the blanket out from under them. I consider our advertisers and the disappointment I must take to their door, and the individual service providers to whom we owe money, who will be dreading the call I must make to them.

After reflection, I'm angry. Up until very recently that was inward-focused: what mistakes did I make, or what alternate decision should I have considered? Why didn't I inform myself better about the alternatives, or see this coming? Now, I'm angry with Barclays, Funding Circle, the Government and all the other people that turned us away. I'm furious on behalf of the entrepreneurs that tried to innovate their way through the worst financial crisis in history and have been told that their efforts are meaningless. And I'm apoplectic on behalf of all the people who have invested time, energy and belief in my business and in me who will have to wait for me to earn back their money, and their trust, in other ways. To all of them, I am sorry.

If nothing else, I want this piece to serve as a message: if the banks do not lend, more businesses like mine will fail. Good people will lose their jobs and will suffer untold medical, emotional and financial consequences. Careers will be derailed and opportunities will be missed. And most of all, we will definitely not make our way out of the financial crisis. There is no way that we can.

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