Business credit still tight despite drop in loan refusal rate

Some businesses are continuing to find it difficult to access credit from their banks, a new survey has indicated.

According to a study by the Institute of Directors (IoD), a third of all firms that applied to their banks for finance in the first six months of the year were declined.

The survey covered some 900 company directors and found that, of these, 39 per cent applied for bank finance, with requests including renewals, extensions and new applications for overdrafts and loans, in the first two quarters of 2010.

Some 33 per cent of those reported that their requests were turned down.

Although the figure is still high, it is an improvement on the decline rate of 57 per cent recorded in the previous survey which covered the whole of 2009.

However, many of those firms that were accepted complained that the terms laid down for loans and overdrafts were tougher.

Some 37 per cent said that they had noticed an increase in the amount of security being requested against any lending, up from the 29 per cent that experienced similar problems during 2009.

No respondents in the latest survey noticed a decrease in the amount of security being requested.

Miles Templeman, the director-general of the IoD, commented: "Although there is clear evidence of a drop in decline rates, we're still concerned that access to finance for businesses remains difficult.

"The survey indicates that some access problems relate to lending criteria becoming more restrictive with regard to the amount of security requested by banks. This raises a question about the functioning of the government's Enterprise Finance Guarantee scheme (EFG)."

Mr Templeman said that the IoD would like the government to clarify the relationship between the state-backed guarantee scheme and bank requirements for personal security.

The IoD argued that it was continuing to hear from members who have had 75 per cent of a loan underwritten through the EFG but who are still required by their bank to put up personal securities equivalent to over half of the loan value.

Mr Templeman added: "We remain convinced that the best way to improve access to finance in the longer-term is getting a lot more competition into the banking sector. Only when firms can choose more easily where they can place their business and switch banks will we have a banking sector that is better focussed on the needs of business customers."

However, the British Bankers’ Association (BBA) questioned the IoD survey and figures.

Angela Knight, chief executive of the BBA, said: “What their survey shows is that around 13 per cent of those they surveyed had a problem with getting more credit – not the one in three implied by their press release. There is also no information on the 13 per cent - for example, what was their business plan? What was their track record? Had they enough security?”

Ms Knight added: “Banks are continuing to make funds available to viable businesses but they need to be sure that borrowers have a robust plan in place to ensure the money is repaid and will work with them to achieve this."