News

April 20, 2012

Small firms lodge more loan complaints

The number of complaints made by small firms about their loan and overdraft agreements increased by more than 10% last year, research by financial services firm Syscap has highlighted.

The total number of grievances lodged with the Financial Ombudsman Service (FOS) rose from 394 to 435 in 2011, indicating that small-business owners were increasingly frustrated by high fees and inflexible lending terms. The figure represents a big jump from 2007 to 2008, when just 136 complaints to the FOS were made.

Complaints made by small firms typically involved issues such as banks refusing to renew loan or overdraft facilities, according to Syscap, or making these available only at a much higher price or with hefty charges.

“There have been too many incidences of banks using the shortage of credit as an excuse to impose the highest possible fees that they can get away with on their customers,” said Syscap chief executive Phillip King.

Certain banks have also forced more small firms to borrow money through overdrafts, he added, rather than offering longer-term options such as leasing which was often cheaper.

King warned that overdrafts were a “very insecure” way for firms to fund expansion. 

“A bank can pull an overdraft at almost no notice causing a crisis for the business and that is a recipe for disaster and major disputes,” he said.

According to the Federation of Small Businesses (FSB), a lack of competition in the banking sector meant that small firms often felt they had no choice but to accept unfavourable terms. “Banks have a captive audience — we know they serve around 83% of the small business sector,” said FSB spokeswoman Sara Lee.

“But we also know our members are still experiencing problems with banks. We hear about members being turned down for loans, even when they’ve got a full order book, while centralised decision making — meaning a business owner’s relationship with a local branch can get overlooked — can also be a challenge for small firms.”

Small firms seeking finance needed to investigate other lending options such as leasing asset providers and business angels, Lee said.

Commenting, the British Bankers’ Association said that banks were willing to lend to viable businesses, but fees and charges for borrowers were “commercially-led” decisions made by lenders based on individual circumstances.