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Seriously Speaking: Tightness of credit to persist for SMEs across the UK

Patrick Leoni Sceti runs his own London-based private equity house which is focused on new opportunities in the North East. Here he gives his forecast on the outlook for credit-hungry SMEs.

SMEs are at the very core of the British economy and any hopes for our country’s GDP improvement will have to come through them, eventually.

Business minister Vince Cable knows this, which is why he has been pacing across the City of London in his latest attempt to get high street banks to lend again to the SME universe.

Despite owning two of the largest banks in the UK, the government seems however incapable of re-establishing the money flow [from banks to business and back again] and return the borrowing circle to a perceived sense of normality.

But this is quite understandably so. Banks are not only in the spotlight as being the reason we went into a recession in the first place but they are currently under increasing scrutiny from both national and international regulators.

The lukewarm reaction to what was perceived as CEBS’s weak stress-testing exercise across 92 European banks indicates more regulatory involvement and intervention is likely in the near future.

At a time when even small lending decisions upwards of £1.0 MM (which used to be the exclusive remit of regional bank managers) now get referred back to national Headquarters and their formal credit committees, the resulting scrutiny of business merits and credit worthiness is now damaging our economic infrastructure and turning the whole SME universe into an unreliable and risky customer base.

SMEs lament the lack of understanding their bank managers have of their business and this shift in decision making powers all the way back to London can only hurt them more.

When a credit control manager sitting in the City goes through the hundreds of credit applications, he will be looking for the tiniest detail that gets them off his desk.

After all, why would a savvy bank, in the current climate, prefer to expand its credit exposure in the fragile and often unpredictable SME sector when all it could do is grant its available funds to a blue chip like Tesco or Vodafone? Surely regulators in the EU and even at here at home will look more kindly at a borrower such as Tesco when it comes to the now famous Tier 1 capital ratios.

In a catch 22 syndrome no bank wants to open its books and be the first to show its head above the parapet in case it gets shot in the face by more credit worries. Until things improve significantly, therefore, Mr. Cable is likely to achieve very little with his errands, if anything at all.

With public spending also being cut left, right and centre, SMEs on the look-out for fresh capital need to smarten up in the way they go about fulfilling their financing needs.

In my column next month I will address how SMEs can “smarten up“ and what they should be doing internally even before reaching out to their banks.

This was posted in Bdaily's Members' News section by Ruth Mitchell .