SMEs urged to talk with lenders as European debt crisis drags on

Small- and medium-sized enterprises are being urged to talk with their lenders about their funding requirements for the year ahead, because their higher risk profile will leave them at the bottom of the pile if banks choose to restrict credit, analysts say.

“It’s about how much lending the books are looking to fund, at what price and to whom,” says Paul Dowling, principal analyst at financial services research firm East & Partners.

“Small business is in competition for this money with everybody else,” Dowling says.

“And banks view small business as quite high risk.”

According to Dowling, small business is the highest margin segment, but may lose favour if conditions worsen.

“If there’s a situation where the banks are challenged in funding their books, the general response will be to go to safety.”

Speaking as the European debt crisis continues, Dowling says small business should take heed of comments this week by the big banks that overseas funding markets were effectively closed.

“As a small business, if you have needs for debt funding, you should be taking this sort of commentary very seriously and you would be well-advised to be talking with your bank in the new year about those arrangements and your ongoing requirements,” Dowling says.

He says SMEs should prepare for more expensive funding, at the very least, and restricted access at worse, if European policymakers continue to struggle to find a solution the markets will accept.

“The 800-pound gorilla is access to credit; that is, just how much lending the banks are going to be funding,” Dowling says.

“For SMEs, it’s really about protecting existing lines; making sure they’re not going to be turned off.”

Dowling’s comments follow a request by the banking regulator for banks to stress-test their ability to handle a sharp downturn in the economy.