'Our way or the high way' - Banks accused of making "unlawful" changes to SME loans

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Banks are “unlawfully” changing loan terms and refusing to negotiate with small businesses, a law firm has claimed.

According to a survey of small companies and investors, a quarter of entrepreneurs, private equity and hedge funds have reported that their bank had tried to change the original terms of their loan. 22% said their lender wanted to reduce the loan’s maturity.

Masoud Zabeti, head of finance and banking at Mischon de Reya has accused banks of putting businesses under an increasing amount of pressure that is unacceptable. According to Mr. Zabeti there are many examples where this appears to be in breach of the facility documentation and banks’ obligations. It could be argued that businesses aren’t entirely blameless. There is ignorance among SMEs of their rights and the responsibilities of banks.

Due to a poor lending environment at the moment many would-be borrowers have low expectations. This has led to a situation where many companies are just happy with any outcome that allows their finance to continue. The fact that we are in a difficult lending environment is highlighted by the Project Merlin figures and latest Bank of England figures. This environment is also perpetuated by new banking regulations such as Basel III that limits the incentive for banks to lend to SMEs.

These factors are one reason why MarketInvoice feel it is important to educate small businesses on other viable options to traditional bank lending. From P2P lending, to debt-for-equity and, of course, invoice finance, SMEs will need to look at their business model and see how they can work with non-traditional bank lending. Promoting awareness for the alternative finance sector is imperative and was one of the guiding mantras for setting-up the Next Generation Finance Consortium (NGFC). The aim of this organisation is to lay the foundations of a network that can provide insight and advice into the different methods of non-bank finance and start bridging the gap between high growth businesses and investment. The NGFC was also established to create a link between new and traditional lending models to ensure business owners can find the right type and source of finance for their individual needs.

Banks have breached their agreements with businesses by charging higher margins reducing loan maturity periods and adding further fees. When companies like Mr. Zabeti’s Mischon de Reya have challenged the banks they often accept they are not to do this. “Sometimes they attempt to say the client is in breach of the terms, with reasons that are suspect to say the least.”

There is a general perception that the banks are all-powerful, an “our way or the high way” mentality. Small businesses need to be aware of their own rights in a banking relationship, but there are also other routes that SMEs can take in search of credit. That is why bodies like the NGFC are so important in educating about alternative finance. A policy of ‘bashing the banks,’ is detrimental to the financial lending cause and more than that it is important that there is a link between new and traditional lending models, a good dialogue to ensure business owners can find the right type and source of finance for their individual needs.

Further Reading:

• Banks’ changes to SME loans 'unlawful’ http://www.telegraph.co.uk/finance/businessclub/9265451/Banks-changes-to... • Double-dip Recession – What does it mean for small businesses? http://marketinvoice.com/2012/04/30/double-dip-recession-what-does-it-me... • MarketInvoice & Capital Enterprise launch the ‘Next Generation Finance Consortium’ http://marketinvoice.com/events/launch-next-generation-finance-consortium/ • Project Merlin lending commitment not met confirms BoE http://marketinvoice.com/2012/02/16/marketinvoice-coverage-in-the-econom... • Basel III: A global regulatory framework for more resilient banks and banking systems http://www.bis.org/publ/bcbs189.pdf

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