Company seeks credit where it's due

Small businesses are said to face their darkest times at the end of a recession. Bled white during the lean times, they often have to borrow heavily to begin expanding again. Many companies will overstretch themselves, and many will not even find a lender.

Reports for Business, a Wimbledon-based credit-rating company, believes that the end of the current recession will be particularly difficult for the country's 1.2 million small and medium-sized companies. 'There is a desperate lack of communication between banks and businesses,' Jonathan Wooller of Reports for Business said. 'In a lot of cases the information is watered down on both sides.'

RfB was established this year by six businessmen in an effort to plug the communications gap. They believe that the banks' domestic provisions of pounds 2.7bn will mean a highly cautious lending policy when the upturn comes. In an effort to stop bad lending, the banks may deny themselves the opportunity of sound lending.

Information offered to the banks is often too sparse. 'Precious few companies have management accounts or cash flow statements,' said RfB's chairman, Jonathan Ward, a former director of Tootal. Since banks tend to lend to 'sets of accounts rather than businesses' nowadays, he believes that many companies risk their future by under-selling themselves to the banks.

A major obstacle today is the disappearance of the old-style bank manager, with lending decisions tending to be made by regional offices with little knowledge about a potential borrower. Bank managers are likely to be transferred between branches after two or three years. With more of their time eaten up by administration and achieving performance targets, they place less priority on getting to know the customer.

RfB argues that companies do not always understand the terms and conditions on which loans and overdrafts are granted. Overdrafts, for example, are regarded by banks as emergency provisions. If a company takes its overdraft to the limit and never reduces it below 50 per cent, it is in danger of finding the overdraft pulled. 'There is often a fundamental misunderstanding of what an overdraft is for,' Mr Ward said.

Banks will sometimes send in independent accountants to evaluate the lending risks. RfB believes that, with its roots in business rather than accountancy, it can often make a better evaluation of an enterprise's prospects.

By spending time with banks and borrowers, it can make possible the granting of loans that might otherwise be lost, it says. It can also reduce the period of agony for companies with no realistic future. 'There are a lot of very fragile companies out there,' Mr Ward said.