Skip to main content

THE CMA RECOMMENDATIONS ON FUNDING FOR SMES


After a two year long investigation, the Competition and Markets Authority (CMA) has released its final report into retail banking.

An important part of this study focused specifically on business current accounts for small to medium sized enterprises (SMEs), given the concerns that have been expressed during the last few years that there were difficulties in the lending process from UK banks to firms.

Banks are an important source of finance to SMEs not only when the business is established, but also when it needs short-term financial assistance to deal with cashflow issues and during periods of growth when it needs funding to expand.

And whilst the CMA does not take the radical step of breaking up the big banks, the report is an important step forward in increasing the efficiency and effectiveness of capital flows from financial institutions into businesses.

Its first significant finding relates to how SMEs choose their banks for funding.

According to research undertaken for the report, there is little evidence that SMEs search for the best deal or, when they do, switch from their existing provider.

When opening a business account, more than half of SMEs merely went to the bank where their owner had a personal account.

In fact, three quarters of young businesses had never compared the costs of their business account with other providers.

Not surprisingly, this means that over 70% of SMEs that had been in business for over a decade had been with their main bank for at least ten years.

Indeed, only 4% of SMEs had switched providers in the last 12 months.

Of course, this could merely mean that banks are doing a good job in looking after their customers.

Indeed, satisfaction with their provider was the main reason given by SMEs for not considering switching bank accounts.

Yet, incredibly, over a third of SMEs dissatisfied with their bank had not considered looking for another provider. So why is that the case?

According to CMA, SMEs perceive that remaining with a bank, even though they are dissatisfied with the service, will be beneficial in terms of future lending decisions.

In addition, many felt that the financial gains from switching banks were not high and all banks were mostly the same. However, this finding was not borne out by the CMA report that showed that many SMEs could save money by switching banks.

Other challenges in moving accounts included a lengthy and onerous account opening process and lack of awareness of the current account switching service that has been set up to make this process easier.

There were also fears from SMEs that if they switched, they were less likely to get the same access to funding from new lenders.

Perhaps the biggest difficulty for many SMEs is to compare the different charges across banks.

Given this, it is not surprising that the main conclusion of the CMA report relates to improving the information available to SMEs about loan and overdraft charges and eligibility.

This would make it easier to compare the products of different banks and to open a new business account of they wish to.

The CMA has therefore instructed banks to publish their existing rates online for greater transparency.

However, the main recommendation from the CMA is the same one made two years ago during my access to finance review for the Welsh Government, namely the creation of an effective price comparison tool available for business loans.

This could provide a ‘one-stop-shop’ for SMEs that would enable them to quickly and reliably compare banks on price, service quality and lending criteria across the whole range of providers.

More importantly for the growth of our financial services industry, this could present a real opportunity for firms in Wales, such as GoCompare, MoneySupermarket and Confused, which are already leading the field in terms of price comparison websites for consumer financial services.

To support this development, the CMA will also require lenders to publish standard rates for unsecured loans and overdrafts of up to £25,000 in value and for large banks to offer a tool on their website to enable business customers to determine eligibility for a loan or overdraft.

Another key recommendation - which was also made during the access to finance review - is for greater links between SMEs and professional advisers in securing the right type of funding for the business, especially as accountants and lawyers can play an important role in supporting SMEs business decisions going forward.

In fact, professional associations such as the ICAEW and the ACCA could and should play a greater role in supporting their members in the provision of information to businesses on options for finance.

Whilst many SMEs will be satisfied with their current banking arrangements, there are others that would wish to make an informed decision, as they would with any other supplier, about the best source of funding for their business.

Therefore, the recommendations of this CMA report are not only good for SMEs as a whole but will hopefully also encourage the better banks to improve their services to support the sector more effectively in the future.

Popular posts from this blog

THE IMPORTANCE OF FRANCHISING

When we talk about start-ups and entrepreneurship, rarely do we discuss the potential of franchising not only as a way of establishing new ventures in the economy but also as a method of growing existing businesses. According to the British Franchising Association, franchising is the granting of a licence by one person (the franchisor) to another (the franchisee), which entitles the franchisee to own and operate their own business under the brand, systems and proven business model of the franchisor. The franchisee also receives initial training and ongoing support, comprising all the elements necessary to establish a previously untrained person in the business. This enables individuals to start their own businesses without having to develop their own ideas and utilising an existing brand and established market. Of course, whilst each franchise business is owned and operated by the franchisee, the franchisor controls the quality and standards of the way in which the business is

THE MANUFACTURING STRATEGY FOR WALES

Last night, I received the following comment on the previous post relating to a piece I had written back in early 2007 about the state of the manufacturing sector in Wales. "Dylan, you seem to be ignoring the fact that manufacturers in Wales have written the manufacturing strategy. Small and large manufacturers, all represented at the Manufacturing forum, have co-written this strategy. WAG has recently supported this strategy and have funded a co-ordinator with resources. Manufactures are happy with this progress as they are following the strategy they wanted. I know that the Conservatives have attacked the strategy as they seem to think that WAG wrote the strategy. They couldn't be more wrong. The Manufacturing Strategy was written by manufacturers, for manufacturers and is supported by WAG. If you don't agree with this, then I can invite you to the next Manufacturing Forum and you can explain to the manufacturers how their strategy is wrong....I appreciate that there is

THE PERFECT STORM FACING THE UK ECONOMY

In his sublime 1997 book on the fate of the fishing boat Andrea Gale, the author Sebastian Junger defined a “perfect storm” as a rare combination of events or circumstances that results in an unusually bad situation.  This term would not be out of place in describing what is currently happening to the UK economy which is being battered on so many fronts with little respite in sight. For example, the war in Ukraine has had an unexpected impact on energy bills in Europe due to the curtailing of exports from Russia which, last year, was responsible for supplying 40% of all natural gas to the European Union. Whilst the UK is not dependent on Russia for its energy needs, the scramble by other countries to find alternative sources has resulted in higher prices globally which has impacted on the fuel imported by the UK with normal suppliers struggling to meet demand. There have also been considerable supply constraints globally which have been driven by manufacturers struggling to get their g