Plea for banks to be more tolerant of struggling businesses

Mar 4 2009 by Peter McCusker, The Journal

BANKS have been urged to take a tolerant line with cash-strapped businesses, as they struggle to stay afloat in the economic downturn.

The call comes from the Institute of Chartered Accountants in England and Wales (ICAEW), which wants the banks to do more to support basically sound businesses hit by temporary problems.

Research by the ICAEW shows that overdrafts are the most common form of finance for all sizes of business, followed by leasing/hire purchase and term loans.

With 96% of overdraft agreements for micro-firms and small companies up for renewal by the end of 2009, the ICAEW is asking for the banks to show more understanding of their needs.

One response from an ICAEW member in the North East illustrates the type of situation many businesses are facing: “The bank renewed our £500,000 overdraft at the same interest rate – but the facility fee went up from £2,000 per annum to £2,500 per quarter.”

Jim Summers, president of the Northern Society of Chartered Accountants, said: “Although these are tough times for everyone, I would urge the banks to be fair when reviewing overdraft facilities.

“Small businesses in particular are often heavily reliant on their overdraft and with current economic pressures, it is important that the banks use this opportunity to see how they can help, rather than using it as a way of increasing financial pressure.

“Obviously it is the responsibility of all businesses to manage their cashflow within the terms of an agreed overdraft facility. But I would also recommend that companies regularly communicate with finance providers so that both sides are aware of the current situation and there are no surprises.”

Over a quarter of SMEs said that their bank had been in contact with them to renegotiate or cancel their overdraft facility in the last six months, compared to 12% of large businesses, according to the ICAEW research.

In most cases the contact resulted in a renegotiated overdraft facility, but in a few instances the overdraft was cancelled.