How bad are banks for SMEs?

Tony FeatherstoneSydney Morning Herald - The Venture Tony Featherstone is a specialist writer on small companies and entrepreneurs

Will the big banks follow the lead of the smaller lenders?

The National Australia Bank apparently “sees” small business, having broken away from the other big banks; the ANZ has pledged to lend $1 billion to start-ups; the Commonwealth has a “can do” approach to business; and Australia is proudly supported by Westpac.

What a crock. Not even Mad Men’s Don Draper could invent a flash TV ad to convince SMEs that Australia’s big banks want to finance more of them, genuinely understand small business, or be there at their time of need, when urgent refinancing is needed.

I recently interviewed a range of lending experts and SMEs on their bank experiences. There were recurring themes: bank debt was increasingly harder for SMEs to access; interest costs and fees had risen; banking relationships were less satisfactory; and banks were quick to pull the plug on struggling SMEs.

It’s always dangerous basing views only on anecdotes or relying on a small sample of views. I’m sure the top 20 per cent of SMEs (by performance) have banks eager to lend them more money and provide top-notch service via their best relationships managers. But what of the other 80 per cent?

As banks spend millions advertising their SME love, they have never been more unpopular with the sector, according to an East & Partners survey of more than 6,000 businesses reported this week. Satisfaction ratings for Westpac, CBA and ANZ have deteriorated significantly since the GFC.

As home owners benefit from lower interest rates, more than four out of 10 SMEs had interest-rate increases on their loans in the first half of 2013, according to an East & Partners survey in June.

About 44 per cent of SMEs that applied for new credit were unsuccessful, according to another East study earlier this year.

Ground-breaking PhD research by Dr Ian Freeman, of Nem Australasia, found an astonishing 71 per cent of SMEs (based on a survey of 500) had a negative or ambivalent response towards their big four bank when asked: “My business bankers understands and supports my business when help is required?” Only 29 per cent agreed with that statement.

Amazingly, two of the big four banks thought their satisfaction ratings in Dr Freeman’s survey would be well above 70 per cent before the question was asked. This suggests banks are completely out of touch with how SMEs rate their service, and badly over-rate their service.

Dr Freeman’s research, which should be mandatory reading for banks, also found only 8.9 per cent of female owners felt their banker understands and supports the business when help is required. So much for banks trying to appear gender friendly.

I could go on with other statistics showing the deterioration in SME satisfaction with banks. Clearly, the evidence shows big banks are pushing SMEs harder than ever with higher rates and fees, despite glossy advertising campaigns that profess their SME love.

Why do banks squeeze SMEs? Because they can. Unlike home borrowers, SMEs cannot easily move between lenders and there are fewer competitors for their business. In turn, SMEs are soft targets when banks need to lift their lending margins to maintain high profit growth and please shareholders.

SMEs I talk to complain of increasingly risk-averse banks, more compliance, less experienced bank managers and constant changes in the bank staff they have personally been dealing with since the GFC. Not enough SMEs realise how even longstanding banking relationships can change overnight if debt covenants are breached.

What’s your view?

Have banks become even harder to deal with in the past year?

Have you struggled to raise bank debt for your SME?

Are you paying higher interest and fees than a year ago?

Has service from your bank improved or deteriorated?

What can be done to improve SME access to bank debt?

The irony is the strength of the banking system helped spare Australia the worst of the GFC, yet lending conservatism towards SMEs is holding the country back. How will we ever turn small companies into large ones if access to capital remains a significant barrier?

There is no easy answer. SMEs have complained for decades about the banks and there have been myriad reviews and calls for action. Yet for all the talk, SMEs have never been more dissatisfied with banks.

The only real solution is greater competition. The big hope is independent second-tier banks take more share from their larger rivals, but higher funding costs put smaller banks at a competitive disadvantage. The return of foreign banks focused on SME lending would also spur competition, and should be encouraged.

SMEs, too, are part of the problem. The sector has shown banks far more loyalty than they have received in return, in part because many SMEs don’t look for a better deal, or because they believe all banks are the same. They need to review their bank almost as often as the bank reviews them.

Something has to give. How much more can SMEs be squeezed by higher rates and bank fees, and lower service, when the sector is under intense cash-flow pressure from a sluggish economy?

And how much growth – and jobs – will be lost when even solid businesses struggle to get sufficient bank debt at a fair price, and have their loan called in at the first or second whiff of trouble?

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