Wednesday, 10 November 2010

Banks are right to withhold lending to some businesses

The vogue line from politicians of all colours at the moment is “we need to get banks lending to business again”. Well, at the risk of siding with the banks, many of the companies that are seeking loans and overdrafts are just not a viable risk.

Plimsoll, the leading financial analysts, contests that the reason companies such as Goldtrail Travel Ltd, and more recently Rok Plc, got into trouble was they existed on micro thin profit margins and the first serious bump in the road crippled them. Without the ability to borrow and paper over the cracks at what had become a barely profitable business model, they failed.

But, why should the banks be there to save unprofitable (or barely profitable) businesses? They have been quite correctly vilified for their reckless lending in the property market yet now they are being unfairly criticized for being prudent. Politicians, business leaders and the wider public must decide – either the banks are to lend responsibly or not, you can’t have it both ways.

It is up to business owners to build a “rainy day fund” to get them through the tough times and if they can’t then the bank is not to blame. Would you lend money to a company that exists on wafer thin margins and has to borrow money just to survive a slow couple of years?

Banks were wrong to lend to high risk individuals so recklessly - but refusing credit to risky businesses is what they must do if they are to fulfill government and electorate demands to lend more responsibly.

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