Coleridge’s Ancient Mariner was a grumpy old man who detained wedding guests with tales of woe, ensuring they did not get any cake. I am conscious of that precedent in recounting the horrors suffered by some entrepreneurs who accepted bank loans backed by government guarantees.
Banks are disbursing £1.3 billion to small companies through a recession-busting lending scheme. But before diving in, credit-hungry entrepreneurs should ponder the pitfalls. I promise not to mention crossbows or sea snakes.
The Enterprise Finance Guarantee launched in January is based squarely on a more modest predecessor, the snappily-titled Small Firms Loan Guarantee. This has doled out more than £4 billion over three decades. Its mission was the same as the EFG’s – to support promising small businesses with weak collateral. Banks lent companies up to £250,000, with the state guaranteeing 75 per cent of the sum.
In general, the SFLG was popular with entrepreneurs. But some disgruntled recipients say that it destroyed their businesses. They accuse banks of playing fast and loose with the scheme, unilaterally revising loan terms and delaying and withholding funds with scant explanation. "There are a lot of sleights of hand that the small businessman may not understand,” says Eddy Weatherill of the Independent Banking Advisory Service, a membership body. "The SFLG has been consistently abused.”
Redress appears hard to come by. Entrepreneurs who have taken their grievances to the Financial Ombudsman Service complain that its orientation to private consumers means that it is slapdash when investigating commercial lending.
Consider Karl Capp. He set up Orchard, a networking website for small companies that wanted to trade internationally. He believes HBOS, the bank, used the SFLG to "ruin my business”. Mr Capp says the bank cut its offer of a £250,000 loan to £200,000 at short notice in 2004, when his refusal would have jeopardised matched funds from another government scheme. He also says HBOS made the money conditional on Capp and his business partner taking out a separate £50,000 loan backed by a personal guarantee. When a web payments clearing service affiliated with HBOS asked the pair for a further £85,000 in guarantees, they declined. Unable to process annual subscriptions, Orchard languished and failed in 2007.
Paul Turner, co-owner of Zenith Cafe, a music company, is another unhappy HBOS customer. The bank offered him a £160,000 SFLG loan. But when the money came through in April 2004, Turner says that HBOS used it to pay off his £82,000 overdraft, thereby covering his outstanding debt with a government guarantee. The remaining £78,000 was inadequate to keep Zenith going. "We were put out of business by the bank,” says Mr Turner, who is fighting eviction from his home.
Nick Brown, meanwhile, says that he was promised jam tomorrow by HSBC, which pledged his renewable energy company Green Amps £250,000 in two tranches. The second tranche – £200,000 – never materialised. To this day, Mr Brown does not know why. When I asked HSBC to elaborate, it declined, saying that Brown’s file was "stored in a remote location”. A landfill site outside Norwich, maybe?
Capp, Turner and Ivor Sutton, a London retailer unhappy with an £80,000 SFLG loan he received from Lloyds TSB, all sought redress via the FOS. It threw out their complaints. Mr Turner says that the adjudicator dismissed HBOS’s actions – on the face of it, prohibited under the rules of SFLG – as "a blip”. Mr Sutton opines: "The ombudsman is OK at dealing with individuals, but not companies.”
Lloyds Banking Group, the behemoth now encompassing HBOS and Lloyds TSB, does not dispute the facts of Capp’s case, while adding that its practices were in line with industry standards. Lloyds denies that it caused Mr Sutton’s business to fail, while declining to comment on Turner’s case, the subject of further adjudication. The FOS says blandly that all its cases are decided on their individual complexities.
What is clear is that banks are given considerable latitude within government-backed loan schemes as the price of their participation. I believe that the outcomes for some businesses are damaging. The fact that the state has rubber-stamped a banking arrangement does not prevent banks manipulating it to clients’ disadvantage. The official complaints system sees the protection of entrepreneurs – tough nuts, reputedly – as a fairly marginal duty.
Banks are lending £20 million a week under the EFG and are on course to exhaust the full £1.3 billion facility by next March. I expect that the scheme will produce its own crop of casualties. The Federation of Small Businesses says that high-pressure selling of additional banking products was common in the early days of the new scheme, though less evident today. The government has a particular duty to keep the banks on a tight rein, having sanctioned a weakening in banking competition.
Thanks for listening. You probably want to join the party now. But first, did I tell you about my sailing holiday? It will not take a minute. Well, it was all going just fine until this ruddy great seagull started flapping round the boat . . .