# New credit rules and regulations for banks – what does it mean for businesses?
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2017-10-17
Category: BANKING
Category URL: https://financedigest.com/category/banking
Meta Title: How Recent ECB and BoE Rulings Impact Small Business Lending
Meta Description: How the ECB's recent rulings on reducing bad debt could affect small businesses seeking credit, leading to potential challenges and risk increases.
URL: https://financedigest.com/new-credit-rules-and-regulations-for-banks-what-does-it-mean-for-businesseshtml

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**Eric DeArmitt,** Nucleus Commercial Finance

Lending has been in the spotlight in recent weeks, with regulators and policy makers across Europe deliberating on how to improve the landscape for credit while removing unnecessary risk. But what do these announcements mean for small businesses in need of credit to survive and thrive?

![Eric DeArmitt, Nucleus Commercial Finance](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/eric-1736843370802-compressed.jpg)

Eric DeArmitt, Nucleus Commercial Finance

**News from the European [Central Bank](https://www.financedigest.com/central-banks-start-turning-off-the-cash-taps.html "Central banks start turning off the cash taps") (ECB)**

A recent [ruling by the ECB has been designed to reduce the “bad debt” within banks](https://www.financedigest.com/swiss-press-freedom-dealt-blow-in-bid-for-overhaul-of-bank-secrecy-rules.html "Swiss press freedom dealt blow in bid for overhaul of bank secrecy rules"), which makes it hard for them to lend. However, in the short-term, the changes could see [banks scaling back their lending to businesses](https://www.financedigest.com/world-bank-scrapping-ease-of-doing-business-index-is-a-reminder-to-focus-on-fundamentals.html "World Bank scrapping Ease of Doing Business Index is a reminder to focus on fundamentals"), as they learn to adjust the way they work. The ECB’s aim is to stop a new pile of problem debts (currently at €1 trillion) being built up inside eurozone banks, by forcing lenders to be more prudent about the way they handle new customers [falling behind](https://www.financedigest.com/behind-ftxs-fall-battling-billionaires-and-a-failed-bid-to-save-crypto.html "Behind FTX’s fall, battling billionaires and a failed bid to save crypto") on repayments. Starting from 1st January 2018, banks will have at most two [years to set aside enough funds](https://www.financedigest.com/hedge-funds-set-to-end-2021-with-inflows-for-first-time-in-three-years.html "Hedge funds set to end 2021 with inflows for first time in three years") to cover 100% of any new non-performing loans, to ensure they can survive in the event that loan recipients default.

This could be bad news for businesses in the short term, who can expect even more [risk aversion from banks](https://www.financedigest.com/the-risks-and-rewards-of-ai-in-banking-in-2022.html "The risks and rewards of AI in banking in 2022"), regardless of the business’ financial stability. [Small businesses](https://www.financedigest.com/the-small-businesss-guide-to-getting-started-in-digital-advertising.html "The Small Business’s Guide to Getting Started in Digital Advertising") will probably be the hardest hit. In the meantime, loan [rates from banks will likely rise](https://www.financedigest.com/bank-of-england-set-for-second-hefty-rate-rise-in-a-row.html "Bank of England set for second hefty rate rise in a row"), especially for unsecured debt and for businesses suffering from a downturn or a weakened balance sheet.

**Restrictions on consumer credit can affect businesses**

Meanwhile, [the Bank of England’s Financial Policy Committee (FPC)](http://www.telegraph.co.uk/business/2017/09/25/bank-england-warns-pockets-risk-growing-200bn-consumer-debt/) has claimed that British high street banks risk losing as much as £30billion from consumer credit defaults in the event of another economic crisis, due to them using the wrong benchmarks to assess risk. This too could have [negative effects](https://www.financedigest.com/negative-effects-of-technology.html "Negative effects of technology") for businesses.

The [key issue according to the FPC is that banks](https://www.financedigest.com/russia-bans-western-investors-from-selling-banking-key-energy-stakes.html "Russia bans Western investors from selling banking, key energy stakes") are placing too much weight on the recent performance of consumer lending, which shows low default rates. Theselow default [rates are in part due to strong economic conditions including reduced unemployment](https://www.financedigest.com/spains-unemployment-rate-inches-up-to-12-87-in-q4-2022.html "Spain’s unemployment rate inches up to 12.87% in Q4 2022"). FPC’s review of the situation shows that in relying on this recent data, [banks are underestimating the losses they might incur should the economy turn](https://www.financedigest.com/central-banks-start-turning-off-the-cash-taps-2.html "Central banks start turning off the cash taps").

While this review is centred around consumers, [small business owners should keep note](https://www.financedigest.com/the-small-joint-replacement-market-to-grow-on-an-innovatively-affable-note-from-2018-2028.html "The Small Joint Replacement Market To Grow On An Innovatively Affable Note From 2018-2028") of the changes for two key reasons. Firstly, these enterprises are likely to feel the pinch as banks rein in their credit, in an attempt to hold more capital as a buffer against a potential downturn. Secondly, this news proves once again that banking credit risk assessments are far from fool proof.

**Brexit and lending**

We’re [set to see additional challenges arise for mid-sized companies seeking finance](https://www.financedigest.com/uks-finance-minister-sets-out-new-economic-approach-to-finance-bosses.html "UK’s finance minister sets out new economic approach to finance bosses") post-Brexit. In its latest update on [potential risks to financial stability](http://www.bankofengland.co.uk/publications/Documents/records/fpc/pdf/2017/record1710.pdf), the Bank of England said: “The risk of disruption to wholesale UK banking services appeared to be slightly higher than previously thought, given that a number of European Economic Area (EEA) firms branching into the UK were not sufficiently focused on addressing this issue.”

With companies from EEA countries providing about 10% of lending to UK businesses, small and mid-sized enterprises may see some lending decline [post Brexit](https://www.financedigest.com/post-brexit-insurance-reform-clear-before-december-says-boes-woods.html "Post-Brexit insurance reform clear before December, says BoE’s Woods").

**What can businesses learn from this?**

While banks have been seemingly overzealous in their credit approvals for consumers, small businesses have fallen victim to excessively risk-averse tactics from banks in the years since the [banking crisis](https://www.financedigest.com/swiss-national-bank-raises-rates-says-bank-crisis-stopped.html "Swiss National Bank raises rates, says bank crisis stopped") of 2008. Clearly, this broad-brush [approach to assessing risk](https://www.financedigest.com/demystifying-us-feds-approach-on-systemic-climate-risk-stress-testing.html "Demystifying US Fed’s approach on Systemic Climate Risk Stress Testing") doesn’t work, often resulting in businesses receiving too much, or too little credit and in the case of small businesses, frequently none at all.

Relying on rigid, outdated rules to assess risk, [banks are not best placed to take the highly tailored approach to lending that smaller companies require](https://www.financedigest.com/how-to-fulfil-the-digital-transformation-requirement-in-banking.html "How to fulfil the Digital Transformation Requirement in Banking"). Without the time taken to properly assess the individual situation, many small [business loans](https://www.financedigest.com/should-you-take-out-a-personal-loan-to-start-or-grow-your-business.html "Should You Take Out a Personal Loan to Start or Grow Your Business?") are broadly determined as too risky and simply declined by traditional providers.

Alternative lenders have been borne from this rigidity, offering a more flexible, tailored approach to assessing risk, by combining innovative, time-saving solutions, with the expertise and [consultancy of a bank](https://www.financedigest.com/bank-of-england-consults-on-remaining-basel-bank-capital-rules.html "Bank of England consults on remaining Basel bank capital rules").

**The alternative approach in practice**

Expert Tooling & Automation Ltd, a highly respected supplier and [manufacturer for the British automotive industry](https://www.financedigest.com/automotive-exterior-trim-parts-market-size-industry-report-analysis-growth-future-trends-top-manufacturers-and-technology-toyota-boshoku-corporation-plastic-omnium-cie-automotive.html "Automotive Exterior Trim Parts Market Size, Industry Report Analysis, Growth, Future Trends, Top Manufacturers And Technology| TOYOTA BOSHOKU CORPORATION, Plastic Omnium, CIE Automotive"), came to Nucleus because the company needed to replace its existing Invoice Discounting facility whilst retaining the same pre-payment and funding limit. The funding was required to continue supplying specialist assembly line components to clients including Jaguar Landrover, [Aston Martin](https://www.financedigest.com/aston-martins-first-suv-helps-push-up-sales-by-more-than-200.html "Aston Martin’s first SUV helps push up sales by more than 200%") and Nissan.

This heritage [manufacturing business had gone from strength to strength in recent years](https://www.financedigest.com/the-next-upcoming-years-to-see-the-oral-solid-dosage-contract-manufacturing-market-integrating-constructive-innovation.html "The Next Upcoming Years To See The Oral Solid Dosage Contract Manufacturing Market Integrating Constructive Innovation"), increasing turnover by five times in under seven years, yet its finance provider pulled back. Although still retaining a solid [balance sheet](https://www.financedigest.com/ecbs-villeroy-lays-out-plan-for-shrinking-balance-sheet.html "ECB’s Villeroy lays out plan for shrinking balance sheet") and order book, after several overseas contracts ran into difficulty, Expert Tooling & Automation Ltd was asked to seek alternatives.

The deal was complex, with a high concentration needed for one of the debtors and it required a specialist understanding of the industry to structure the facility appropriately and support the [client’s operations](https://www.financedigest.com/white-bullet-appoints-stuart-dickinson-as-director-of-advertising-operations-and-client-success.html "White Bullet appoints Stuart Dickinson as Director of Advertising Operations and Client Success") – the type of deal that traditional lenders recoil from, because of the input required.

After spending time getting to know the company, we were able to match the previous provision and deliver the bespoke £8 [million Invoice Discounting facility](https://www.financedigest.com/uks-superdry-in-talks-with-bantry-bay-to-refinance-85-million-facility.html "UK’s Superdry in talks with Bantry Bay to refinance million facility") that Expert Tooling & Automation Ltd required. The [funds have enabled Expert Tooling& Automation Ltd to continue providing a great service to clients](https://www.financedigest.com/impact-com-closes-2021-with-new-google-pay-integration-150m-in-funding-and-51-increase-in-clients-yoy.html "impact.com closes 2021 with new Google Pay integration, 0M in funding and 51% increase in clients YoY") and crucially, to grow.

**[Growing a business](https://www.financedigest.com/title-homeopathic-veterinary-medicines-market-growing-at-a-cagr-of-5-business-and-future-opportunity-2031.html "Title: Homeopathic Veterinary Medicines Market Growing at a CAGR of ~5% | Business and Future Opportunity – 2031") in adverse times**

For a business looking for growth finance, news seems to be appearing every day, which sets a [bleak picture](https://www.financedigest.com/uk-retail-sales-jump-unexpectedly-but-big-picture-bleak.html "UK retail sales jump unexpectedly, but big picture bleak") of the current lending market. But businesses should not be disheartened. With the current turbulence in the traditional lending market, businesses should seek [alternative finance](https://www.financedigest.com/demystifying-alternative-finance.html "DEMYSTIFYING ALTERNATIVE FINANCE") lenders that have a true understanding of the sector and can support businesses of all sizes from start-up to small, mid and larger enterprises. These companies need to set themselves up with a lender who is committed to a long-term partnership, rather than a one-off cash injection.


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