MORE business owners are being turned away by banks as the effects of the credit the crunch continue to linger. Yet despite this banks say they are still “open for business”.
Since the start of the credit crunch last year, the percentage of applications for finance from business owners that Absa approved had dropped from 70% to 60%, while at Nedbank the rate of approval had dived from about 55% to around 40% of all applications.
But Faisal Mkhize, managing executive of Absa Small Business said this had come at a time when the number of applications were also down.
He said the unit was now receiving 20% fewer applications for finance than last year. The majority of applications that now landed up on its desk were for expansion capital rather than for start-up finance and these were generally for larger, rather than smaller amounts.
Absa Small Business, which lends to businesses with an annual turnover of up to R10 million, had also tightened its lending criteria, by putting in place measures such as a “stress test” where bank looks at what contracts an applicant might have in place and whether the business would be able to stay afloat for three to six months for example, if it lost these contracts.
Absa is the leading bank when it comes to handing out Khula-backed guarantees, but for the last eight to nine months the bank had limited its exposure to Khula,
particularly for start-up businesses which made up half of the bank’s book linked to the government agency’s guarantee scheme.
A lending limit of R100 000 on Khula guarantees for start-ups had been put in place, even though the guarantee scheme will ordinarily lend out to R1 million.
Mkhize said now that the bank had proper systems in place to handle Khula guarantees it was looking to increase this limit to R350 000 or R400 000 for this group.
The bank was also helping struggling clients to restructure finance agreements and had for the first time ever put in place a restructuring policy specifically for its small business clients.
Assistance could involve moving short-term debt into long-term agreements, granting an interest holiday, temporarily waiving service fees and increasing working capital requirement.
Mkhize said about 10% of clients were being assisted in this way, which he said was up from the usual 5% of clients that the bank assisted in this way.
He said Absa had seen an “upswing” in bad debt, something it hadn’t seen in five years and a “high level” of the bank’s book now fell into the legal department. Actual impairments raised for 2008 came to 4.07% of the total advances book. For 2009 the bank projects this ratio will rise to 4.53%.
The bank had also set up a forum where business owners can have application that are turned down by business managers or relationship managers, reviewed. Said Mkhize: “This is also linked to the recession because when times are tough you have to reinvent yourself”.
Nedbank’s Managing Executive for Small Business Services Sibongiseni Ngundze said his unit had experienced a 40% drop in applications from businesses that were looking to access finance for the first time.
Said Ngundze: “Our view is that the entrepreneurs have become quite cautious about taking on any new debt which stands the chance of not being repaid”.
He said Nedbank, which defines small businesses as enterprises with a turnover of below R7.5m, had initially taken “quite a hard stance on marginal transactions” and had been “aggressively” declining these. Only those with solid businesses cases were securing finance, he said.
In March last year the bank had set up a dedicated team to encourage branches to look through their client portfolios to determine if any business were in danger of defaulting on payments and needed to engage with the bank.
He said while the bank had restructured lending agreements with some clients, others had engaged mentors who had helped them with turnaround plans.
Of those businesses that approached the bank during the current economic period, franchisees and those with tenders or contracts had a higher chance of securing finance, he said.
Sean Robertson, director of personal and business lending at Standard Bank, said though the bank didn’t have a specific policy in place to address the credit crunch, it was being more careful when it came to approving applications for finance.
He said the bank was now paying closer attention to a business’s cash flow projections before approving finance. It was also “quite watchful” around applications from certain industries such as the motor industry, as well as those from the transport, retail and mining sectors, but would still opt to approve any application based on its merit.
Like other banks, Standard Bank was also seeing fewer applications, but Robertson emphasised that Standard Bank was still open for business.
This article appeared in Business Day on 21 July 2009.
Stephen Timm is a