For Finance Monthly, Nic Beishon, Head of Commercial at Equifax, the consumer and business insights expert, below comments on the new Standards of Lending Practice for small businesses, which came into effect last week, 1st July 2017.
As major contributors to the ongoing success of the UK economy, SMEs will benefit from the new Standards of Lending Practice. The standards will drive good practice for lenders when assessing different types of business, protecting those borrowing money and delivering fair customer outcomes. Evaluating a borrower’s capacity to meet their ongoing repayments is increasingly important to safeguard them against over indebtedness, and to identify businesses at risk of falling into financial distress.
The standards now apply not just to the very smallest business, but to any business with a turnover of up to £6.5 million. In order to meet their responsibilities to both clients and regulators, lenders need a 360-degree view of the applicant to understand their financial health. They should not just look at the businesses financials, but also the individuals behind the business. In particular, lenders should consider information such as the business current account turnover data and the use of overdrafts to assess whether, for example, a loan is appropriate. This should be the case no matter the size of the SME, whether the person being dealt with is a sole trader or a director of a company.
This information is not just important at the time of application, it should also be assessed on an ongoing basis to identify any change in circumstances, and in the case of financial difficulty, the best way to assist the business owner.
The SME sector is vital to the UK’s continued economic recovery and the standards are designed to create fairer lending for these important businesses. Integrating a mix of commercial and consumer analysis into lending decisions will allow lenders to commit to responsible loans while helping the sector to grow.