NO END IN SIGHT: SMALL BUSINESS BANKING WOES
I RUN a small but fast-growing group of pubs called The Draft House. We’re known for selling a wide range of craft beer, simple food and – I hope – a warm welcome.
In 2009, we were days away from opening our second site in Northcote Road, Clapham. We were managing our cash carefully but knew we were going to need our £50,000 overdraft (in place for this particular business since 2004) as working capital after an extensive refurbishment of the new site. Then the mobile rings. My “Relationship Manager” is calling me in “to review our account”. A week later I left the meeting with no overdraft.
The Draft House had no bank debt and was forecast to take £2m in revenue and generate cash in the following year. Yet we were not to be trusted with a £50,000 overdraft facility at the time we needed it most. And this followed my ten-year relationship with said bank, during which time we had always honoured our commitments and paid hundreds of thousands in fees and interest with a series of businesses in our sector.
But since then, nothing. No lending or any other kind of relationship. Since then we have continued to grow and will be opening our fourth and fifth site in the coming months but inevitably my shareholding has been diluted in the process. In a “normal” banking environment this would not have happened, or not to the same extent.
Needless to say we are no longer with that particular bank. But the bitter taste lingers, especially as the same bank reported record profits for 2009-10. And the feeling lingers that in a banking market which has grown dramatically less competitive during this recession, the men in suits no longer need or want to bother with lending to pesky small businesses (which are actually the future of our economy) when they can make so much easy money elsewhere.
The excuses are legion – and it is undoubtedly true that reckless commercial lending was as much to blame for the demise of banks like HBOS as exotic derivatives. But the days of the good old fashioned look-you-in-the-eye-mano-a-mano judgement call by the banker you actually had the meeting with are a thing of the past. Now a well-scrubbed nice but Tim turns up at your place of work, oozing platitudes and looking smart in a blue suit. He takes away your business plan which shows a strong historical performance coupled with a carefully thought out expansion plan that requires a judicious amount of bank funding. A few weeks later he comes back: “Credit say no. Unless you’re prepared to put up a personal guarantee. And pay five points over base.” And that’s if you’re lucky.
Luke Johnson, the man who grew Pizza Express from 12 to 250 restaurants, has this summer taken a significant stake in The Draft House. I dare say that having someone of his calibre on board may tip the balance on our bankability and indeed we are just starting what I hope will be a new and positive banking relationship since that event. But what of the thousands of other promising companies, desperate to expand and take on more employees who either cannot do so, or must risk demotivation by diluting founder shareholdings.
Recent research by the Bank of England shows that small businesses are struggling to get credit and, where they succeed, loans are getting more, not less, expensive. Emanations from the Government regarding direct lending via direct lending or guarantees have yet to be explained to us folks on the ground. I personally doubt they will succeed without radical structural change in the market and certainly not in a useful timeframe.
With this in mind, and although I have never been in favour of government intervention in business, it does seem obvious to me that we need to make it harder for banks to make the easy but high risk money, so that lending to us lot becomes a requirement for their implicit government guarantee. This would drive real, long-term growth in the economy and jobs.
Charlie McVeigh is the founder of the Draft House www.drafthouse.co.uk.