Brown, Mike, Financial Management (UK)
The British Bankers' Association has issued new guidelines intended to improve relations between small companies and their lending banks. Mike Brown asks how the Statement of Principles will affect SMEs
The British Bankers' Association's (BBA) new Statement of Principles on how lending banks should work with small- and medium-sized enterprises (SMEs) came into effect at the beginning of June. All major high street banks are committed to the new Statement of Principles which sets out approved best practice for both 'banks and businesses when dealing with loans. In it, the BBA stresses the need for openness to avoid the problems that arise from lack of communication.
One new recommendation is the appointment of investigating accountants as administrative receivers where banks are considering a rescue proposal. The banks have agreed to take into account advice from independent accountancy sources and, where appropriate, will appoint an alternative receiver if a company's directors are not happy that these accountants are fully independent.
The original Statement of Principles was launched in 1997. It was a response to government proposals to introduce legislation requiring lending banks to give five days' notice before appointing an administrative receiver, unless the banking industry could provide reassurance through a code of practice.
The revision process for the Statement of Principles -- the next review is due in two years' time -- involved consultation with leading UK business organisations. These included The British Chambers of Commerce, the CBI, the Federation of small Businesses, the Insolvency Service and the Banking Ombudsman.
A key feature is the co-operation and dialogue between banks and their business customers. From the day a firm opens an account, the bank will endeavour to foster a spirit of co-operation and will work with the customer to ensure that it offers the right service and advice. If customers get into difficulties, they are encouraged to take early advice from their banks. This way, the BBA believes, any difficulty can be resolved before it turns into a crisis.
At the start of a borrowing relationship, banks undertake to ensure that they set out clearly, in writing, what has been offered. If a borrower is uncertain about any aspect of the loan agreement, the bank should clarify it immediately. Borrowers are encouraged to ask questions and take independent advice before making any commitment.
So-called "facility documents", provided by the banks at the start of the loan, are legally binding for both parties, so businesses should sign them only if they fully understand the terms. Atypical facility document sets out:
* the amount and purpose of the loan;
* whether the loan is committed for a particular term or repayable on demand;
* when any repayments are to be made and the amount of those repayments;
* the interest rate and any other charges;
* when reviews of the loan are to be undertaken;
* what securities and guarantees, whether existing or new, will be required -- there will also be a mention of any minimum values to be maintained;
* in what circumstances an earlier review or repayment would be initiated;
* the information that the borrower will be required to give the bank over the term of the loan and at the reviews. …