Four in ten SMEs win appeal against rejected bank loans

Around 40 per cent of SMEs who had their loan requests rejected by a bank have had their appeals overturned, an annual report from the British Bankers Association (BBA) has found.

According to the independent review, 2,177 SMEs appealed against a bank's lending decision in the last year since the new appeals process was introduced, with 847 businesses eventually reaching an alternative lending agreement.

Figures revealed that UK banks agreed to the majority (86 per cent) of the 827,000 applications for credit, such as loans, credit cards and overdrafts, from SMEs over the last 12 months. Of the 14 per cent which were declined, only two per cent were appealed against - despite the high number eventually being overturned.

Report author Professor Russel Griggs concluded that many more businesses would apply for bank loans if they realised how successful the appeals process had been.

Griggs, former chair of the CBI's SME council, said: "There is this odd psychology in that the more protection you give people, the braver they will be.

"My note to businesses would be that there is an appeals process, and it does work because we have the data to prove it."

Business groups such as the Forum of Private Business (FPB) are now calling for increased awareness amongst SMEs of the appeal's process.

The FPB's senior policy adviser, Alex Jackman, said: "The fact that almost 40 per cent of lending appeals have been completely overturned says very clearly that banks are simply not gauging some small business lending risks accurately in the first place, and that has to change."

"The report is right in identifying an over-centralised banking system that relies far too heavily on automated risk criteria and on data from credit rating companies, many of which appear to use wildly different factors to assess a firm's creditworthiness."

Britain's largest banks agreed to a new set of principles regarding the appeal's process when it was launched in April 2011, meaning all loan rejections must be reviewed by a second person from within the original bank. Businesses with a turnover up to £25 million can take advantage of the appeal process.

The FPB recommended that bank managers should understand businesses on a more personal level and make individual lending decisions accordingly. It is also calling for increased competition amongst both larger banks and smaller alternative lenders, and a standardisation of the credit rating criteria.