Crystal Umbrella

Small business issues pertaining to unfair banking practices are not new. However, as the credit crunch and subsequent recession hit, small businesses were faced with increasing difficulty obtaining lending from their banks. Once again, last month, figures from the British Banking Association showed that business lending was in decline. There has also been much frustration regarding the length of time small businesses and contractors have had to wait to find out if their application has been accepted or declined.

Now the Forum of Private Businesses is asking small businesses to take part in a survey, which will ask for their banking experiences. This is being conducted on behalf of the Office of Fair Trading. They want to know how the big banks are treating small businesses. The Forum is trying to encourage as many small businesses as possible to participate in the survey to provide the OFT with plenty of evidence of unfair treatment.

Thomas Parry, FPB Research Manager, commented: “Clearly, the issue of the way banks treat small firms has received an enormous amount of attention recently and sparked a lot of debate.

“One the one hand, groups like the Forum have been arguing that viable smaller firms are being unjustifiably denied credit, or offered it at an extortionate cost, by risk-averse banks which often don’t understand their needs.

“On the other hand, the banks and their industry groups have claimed that lending is down simply because demand is down and they are doing everything they can to increase the flow of finance to business. There is also a wider debate about competition between banks, with some critics arguing that smaller firms, particularly in Scotland, face a limited amount of choice in the marketplace.”

Mr Parry concluded: “We hope this survey will provide the OFT with clear, empirical evidence and reinforce the valid concerns many small business owners have over their relationships with their banks, and the banking industry in general.”

Dell has become the latest company to find themselves in the Forum of Private Business’s payment league table which serves as a ‘hall of shame’ for those companies whose payment terms are deemed unacceptable by FPB.

Dell suppliers have received communication to inform them that they will now face an additional 2 weeks waiting time before invoices are settled. This means that suppliers will now have to wait a total of 65 days before they receive payment. The communication stated that the “current economic conditions” were forcing the company to “standardise” payment terms for all of their “valued” suppliers.

The government has been striving to ensure that small firms have their invoices settled promptly but Dell’s decision is completely at odds with this. The FPB commented: “When they receive a letter like this, smaller suppliers have no choice but to agree and stay silent.”

One of the suppliers who received the communication stated: “As a ‘valued’ supplier of IT services to Dell I was dismayed to receive this notice via email regarding a change to their payment terms. Ironically, the reason for the change is apparently due to the current harsh economic climate. How is extending payment terms beyond the current draconian 50 days to 65 days going to help Dell’s legion of ‘valued’ SME suppliers, particularly when most of our suppliers demand 30 days net?”

FPB concluded: “Small businesses continue to suffer from the blight of late payment, which devastates cash flow and forces firms into administration. Companies like Dell have a responsibility to pay promptly – failure to do so can mean the whole supply chain seizes up.”

The Forum of Private Business has urged the government to think about the needs of smaller businesses when developing legislation. They have criticised current legislation for only considering big businesses. They have said that this often results in smaller businesses, with fewer employees, having difficulty competing with their larger counterparts.

Their comments were made in response to a government consultation. The ‘Thinking Business in Policy’ review aims to understand the effect of policy making on business. Amongst their other concerns, the FPB has highlighted the forthcoming Equality Bill as an area of immediate concern. The FPB believe that the government underestimate how much time is needed to fully comprehend new legislation before it can be implemented by firms. For example, the government have assessed that an SME should need only one hour to comprehend the disability discrimination section of the new act. However, the FPB believe that for a company with little experience in interpreting legislation, much more time will be required before the necessary changes can be made.

Matt Goodman, policy representative for FPB commented: “We believe that, through improved understanding of the nature of small businesses and by making much more accurate assessments of the implications of the legislation, decision-makers can make informed judgements about the advantages and disadvantages of policies. Policy-makers should also consider how their policies are going to boost the UK economy.”

He concluded: “It’s not enough simply to consider the social benefits of legislation without giving thought to the bigger picture. Many businesses feel they are often seen as those which should automatically pay for attempts at influencing social change.”

As borrowing continues to be problematic this year, it is predicted that small business owners with financial difficulties may find themselves looking for financial assistance from their family and friends, not to mention borrowing on personal finance such as credit cards. This information comes courtesy of a survey conducted by Graydon UK, a commercial credit reference agency, and the Forum of Private Businesses. The information was based on 2009 but with these issues still prevalent in 2010 it is likely that the same pattern will continue.

The survey showed that 28 per cent of business owners felt that they had no option but to turn to loved ones for financial help due to the lending conditions adopted by the banks. A further 8 per cent admitted to using their personal credit cards.

The survey also looked at those who ad attempted to access funding from the banks. 40 per cent who applied for finance in the second half of 2009 were refused. 52 per cent were refused business loans and 28 per cent asked for an overdraft extension and were refused.

Discussing the results of their survey, Graydon UK said this move towards accessing personal finance is having a direct impact on the growing number of insolvencies during the latter half of 2009.

Phil Orford, chief executive of FPB, said: “The continuing credit drought means more entrepreneurs are being forced to seek alternative sources of finance – including family, friends and personal loans. The latest insolvency figures show that this level of personal risk is unsustainable. The danger is that the UK will become increasingly uncompetitive as fewer people are encouraged to start their own businesses.”

Last month the Government’s enterprise tsar Lord Alan Sugar made some comments about small business owners being moaners which caused a great deal of upset within the business community. However, Lord Sugar has spoken out to insist that his comments were taken out of context.

In a new article for the Forum of Private Business, he writes: He writes: “The majority were cases where it wouldn’t have been right for the bank to lend in the first instance, owing to things like having a poor business case, a lack of security or simply unrealistic expectations. The Government has always made it clear that it only expects banks to lend to viable businesses. Inappropriate lending in a large part precipitated the global financial crisis. When I started my business career there was no question of going to a bank to get money to set up a business. The reality then, and now going forward, is that the banks want to do business, but they will expect sound business cases to be put before them. It would be both unrealistic and undesirable to expect them to lend as freely as they did over the last 10 years.”

Lord Sugar continued: “In my business career, when I found a bank wouldn’t lend to me, I went back to my proposals, took account of what I was being told and reworked my plans to get the finance. The banks proved a good barometer of the advisability of my plans.”.

In response to the article, Phil Orford, chief executive of FPB commented: “When Lord Sugar’s comments hit the headlines last month, I was one of the first people to take issue with them. However, Lord Sugar insists his words were taken out of context and I applaud him for taking the time to set the record straight. I still can’t say I support his views on the credit conditions currently faced by small firms – I think the problem is much more widespread than he realises. But at least he cares about his perception among small firms and has made the effort to address their concerns through our magazine.”

The Forum of Private Businesses (FPB) is lobbying the government to include specified tax cuts within their pre-budget report on 9^th December. The FPB have recently surveyed all of their members and more than twenty per cent believe that the government should be focussing policies to relieve tax burdens on SMEs.

A number of changes have been suggested by FPB in their proposals to government. These include the creation of a national insurance holiday for businesses with less than ten employees alongside a delay in the implementation of the planned 0.5% NIC rise. They would also like to see corporation tax cut to 20%. They see this as a small concession by the government which could really benefit businesses.

VAT is another major taxation issue and the FPB would like the return of the 17.5% rate should be postponed to a more reasonable timescale. They also believe that VAT should be reduced permanently within labour-intensive sectors to just 5%.

Finally, they are asking that all small businesses are automatically enrolled for the Small Business Rate Relief as figures show that less than half of the businesses who qualify for this relief have actually applied for it.

Phil Orford, FPB’s Chief Executive, said: “There is still a long and difficult road ahead of us, but small businesses are key drivers of the economy and the Government must create a tax environment in which they can thrive. That means tax relief in specific areas that would help to foster cash flow, innovation and employment opportunities so that small businesses are able to seize the opportunities that will emerge as the economy emerges from recession.”

The Apprentice’s Lord Alan Sugar has come under fire for comments he made; declaring many business owners as “moaners”. The business and enterprise tsar’s remarks came as complaints about the lack of bank lending to small businesses are on the increase. Sugar stated that the majority of complainers had no grounds to grumble. He also dismissed young business owners who, he said, were only used to the “Disneyworld” lending over the last ten years.

His comments have been criticised by the Forum of Private Business (FPB) as “misguided”. Their chief executive, Phil Orford, stated: “Sir Alan’s comments were quite insensitive and completely erroneous on several points. Contrary to Sir Alan’s comments about younger entrepreneurs harbouring unrealistic expectations about credit, I can tell him that many of our members are similar in age to him – they are in their fifties and sixties and they have lived through several recessions. Yet they are still deeply unhappy with the restrictive lending conditions and the increased lending costs which have been imposed on them over the past 12 months.”

He continued: “Secondly, his view that banks should be free to do what they please and shouldn’t be lectured to by the government misses the point. The financial bail-out used a vast amount of taxpayers’ cash and we will all be paying the price for years to come through higher taxes and public spending cuts. So it’s not surprising if business owners feel as though they should be seeing a little more support from the very institutions they helped to save from collapse.”

Orford concluded: “Sir Alan is of course a celebrated rags-to-riches success story who started his business empire from his family’s East End flat. But perhaps his £700 million fortune has dulled his memories of running a small firm and lessened his understanding of the very people the Government hired him to represent.”

Northgate Information Solutions have doubled the time it takes to pay their suppliers. This increases the payment of invoices from thirty days to sixty days. Northgate are a provider of many public sector IT contracts. Effectively this means that contractors who invoiced for work carried out in July, expecting payment in August, will not be paid until September. This move has left many contractors out of pocket.

Northgate announced that they made these changes public back in June. They have defended their actions by saying that they are merely standardising their payment structure. They also stated that as their customers have changed payment terms, they had no choice but to pass these changes on.

Northgate have now found themselves listed in the Forum of Private Businesses’ Hall of Shame. This list serves to highlight companies who operate poor payment practices. The Forum of Private Businesses has also written to the owners of Northgate to remind them that their actions could have a serious effect on the business of their suppliers.

One supplier who has been affected by this change to Nortgate’s payment times said that this was proof that, “big companies are still trying to bully smaller suppliers.”

He continued, “When I received the letter informing me that the company was standardising its payment terms, I thought it would be beneficial for us all to work together more smoothly. It took several readings before I realised what the catch is. It certainly isn’t for the benefit of the supplier base that they are increasing the time they pay invoices from 30 to 60 days. One of the things I resent is that they are not being straightforward – they’re pinching an extra 30 days from me.”

Northgate have said that their suppliers have ten working days to decide whether or not to accept these changes.

Chief executive of the Forum of Private Businesses, Phil Orford, said, “Although we can sympathise with the company’s claim that it is not being paid on time by many of its public sector customers, it is disappointing that it is passing on these additional costs to its small suppliers.”