At first glance, Project Merlin seems like a great leap forward. The banks have pledged to lend more to small businesses, and they’ve also beefed up the Business Growth Fund – so new and growing firms should, in theory, be able to borrow money more easily.
But it’s not as simple as that. The agreement is shot through with loopholes, which could give the banks reason to turn down perfectly legitimate loan applications. Furthermore, it isn’t especially clear – particularly if you’ve never previously applied for a bank loan and don’t’ know how to go about it.
Startups believes that Project Merlin needs real teeth, and these should be provided through a series of additional measures. Here is our five-point plan to ensure the promises of Merlin don’t disappear in a puff of dust…
Edward Rimmer, UK chief executive of Bibby Financial Services, recently said that, "even if the proposed terms of Project Merlin come to fruition, whether the banks will actually commit to lending this sum is another question all together.”
Rimmer’s scepticism is well-founded. In a recent survey, YFM Equity Partners sought comment from 165 chief executives of small to medium-sized firms, all of whom had applied for bank loans. Little more than a fifth of respondents had received 100% of the funding they sought from the banks.
It seems banks view small businesses as high-risk, low-reward prospects, and don’t believe they will get their money back if they lend money to such firms. Given the number of small businesses which go bust in infancy, this is hardly surprising; however, for the sake of Project Merlin, it has to change.
Banks need to start seeing small business loans as an opportunity, not an obligation. An opportunity to help lay the foundations for an exciting company, and contribute to regional economic development.
Last month William Chase, founder of Tyrrells crisps, told Startups he advocated the appointment of a ‘minister for common sense,’ to provide a bridge between the banks and the government. We totally support his view that an intermediary is required; someone who can build bridges between the government and the banks, and ensure effective communication between the two.
Ideally this person would have experience in both banking and small business, yet be independent of both. It’s a tough job, but someone really has to do it.
During the Project Merlin talks, insiders claimed there was a difference in opinion between the banks and the government representatives on what exactly constitutes a small business. Such disparity is worrying, as it could allow the banks to wriggle out of their Project Merlin obligations.
A start-up firm which is doing particularly well could present a perfectly good business case to the banks, only to see their request for a loan rejected because they do not fit the criteria for a small business. Companies with high turnover, large numbers of retained clients and sizeable premises could lose out.
Startups believes that concrete criteria should be put in place to determine what does, and does not, constitute a small firm; number of staff, volume of business, size of premises and size of turnover should all be factored into the criteria.
That way, any business wishing to apply for a loan can clearly see whether or not they are eligible, and the banks won’t be able to fall back on ambiguity or technicalities.
In a recent interview with Startups, Steve Hughes, economic advisor to the British Chambers of Commerce, emphasised that lending decisions have to be made in a transparent manner. This view is echoed by Phil Orford, chief executive of the Forum of Private Business (FPB), who told Startups that “Transparency…(from) both banks and businesses should be a key pillar of Project Merlin.”
But who will guarantee this?
Many commentators have emphasised the difficultly in getting banks to confirm how much they are lending, given the complexity of their accounting procedures. Project Merlin provides a perfect opportunity to smash through the opacity of the British banking culture, and strike a blow for openness and honesty.
The Bank of England will monitor bank lending practices, and publish quarterly reports. But we feel this does not go far enough.
Startups believes that banks should be compelled to publish annual reports detailing the number of small business loan applications they receive, and the number they accept. If any firm demands reasons why their application was rejected, these should be provided in full – so everyone knows exactly where they stand.
As we understand it, provision of credit to small firms will, from now on, be among the performance targets used to determine the bonuses of bank chief executives. But is this a sufficient incentive to honour the Project Merlin obligations? Will the threat of a slightly reduced bonus really persuade banking chiefs to dole out cash to small firms?
In our view, Project Merlin should be reinforced with a series of punishments, such as name-and-shame campaigns and heavy fines, which will persuade all banks to toe the line. If the banks genuinely fear the punishment, they’ll comply – simple!
When he spoke to Startups, Phil Orford told us that those regulating Project Merlin should “realise that, as identified by the new ‘Doing business Together’ initiative, many business owners need better support, information and advice to be able to produce and present reliable, standardised financial information in order to establish their creditworthiness and increase their chances of success with lenders.”
We couldn’t agree more. The majority of small business owners have no formal training in how to present financial figures, and lack the expertise to create an effective pitch. A specific body should be charged with this responsibility; any small firm wishing to apply for a bank loan should be given the training and advice they need.