Page last updated at 10:26 GMT, Thursday, 23 October 2008 11:26 UK

Banks to face small firm showdown

Lord Mandelson said banks did not want to see small firms fail

The government is to bring together bank bosses and small business representatives to "thrash out" differences between them.

Plans for the forum follow a meeting by chief executives of UK High Street banks, Chancellor Alistair Darling and Business Secretary Lord Mandelson.

As a condition of the 37bn government bail-out, RBS, HBOS and Lloyds TSB must continue lending at 2007 levels.

But many firms have said the recent terms offered by banks have worsened.

Lord Mandelson said the forum - to be set up in the next few weeks - would hopefully help ease tensions between the two sides.

"Where there are issues about the availability of lending and the terms of lending, they can thrash these out and tease out the problems," he added.

"There's willingness to make sure that we get through these very difficult times. Banks do not want to pull the plug on small business unnecessarily - they want to help where they can, but banks are facing difficult conditions of their own."

Deal delays

Adam Whipps

I couldn't believe it, they (the bank) had more than doubled the interest on my overdraft... They have got us over a barrel

Adam Whipps, Leisure Marketing

Earlier this week, Lord Mandelson told a Business Select Committee hearing there was anecdotal evidence that smaller businesses were being hit with a "double whammy" by some banks - being asked for more security and higher interest payments on loans, while also paying extra charges.

And the British Chambers of Commerce (BCC) said that firms were finding it increasingly difficult to access funding.

"The cost of money is undoubtedly higher than it was and we see no evidence of it coming down," said the BCC's director general David Frost.

"Banks are charging for services that were previously parts of the deal," he added.

"And the idea of relationship banking is breaking down. Everything is going through regional offices and it is taking much longer to get the OK on a loan or an overdraft."

No quick turnaround

A member of the Bank of England's rate-setting Monetary Policy Committee said it could be months before firms began to feel the benefits of measures planned to tackle the credit crisis.

"The banks need to feel that they are in a better position... I wouldn't necessarily expect that to turn around very quickly," Kate Barker said in an interview with finance website

"We would certainly hope over the next few months that the actions that have been taken start to feed through to businesses because we certainly realise that small businesses particularly are finding it much more difficult."

And Ms Barker warned that banks' lending policies were "not going to go back to how it was prior to this crisis starting".

Loans increase

The body representing the UK's main high street banks said the industry was "committed to helping businesses through the economic downturn".

Behind every successful entrepreneur, there has been an initial helpful relationship with a bank manager who shares the business vision
Angela Knight
British Bankers' Association

But the British Bankers' Association (BBA) said that in a recession, some firms would "inevitably" fail, and it urged businesses to review their plans and engage with their bank to put themselves in a stronger position.

The BBA said it was continuing to finance firms. In the year to June 2008, it said, the amount of business loans provided by its members grew by 11% to 44bn, while overdrafts grew by 3% to 9.2bn.

"The UK banking industry has always been and remains a strong supporter of small businesses," said BBA chief executive Angela Knight.

"Behind every successful entrepreneur, there has been an initial helpful relationship with a bank manager who shares the business vision.

"Banks are proud to be working actively in this essential stratum of the UK economy."

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