Banks’ changes to SME loans ‘unlawful’

A quarter of entrepreneurs, private equity and hedge funds have reported that their bank had sought to change the original terms of their loan, while more than one in five said their lender wanted to reduce the loan’s maturity, according to a survey of small companies and investors reports The Telegraph.

Masoud Zabeti, head of finance and banking at Mishcon de Reya said businesses are being put under “increasing and unacceptable pressure by their banks”.

“In many instances, this appears to be in breach of the facility documentation and banks’ obligations,” he said, adding that a lack of awareness among businesses “of their rights and the obligations of the banks” and low expectations among borrowers had led to a situation where many companies “view any outcome that allows their finance to continue as being positive”.

Mr Zabeti said he had seen banks breach their agreements with companies by charging higher margins, adding further fees and reducing loan maturity periods.
“When we challenge them, they often have to accept they’re not entitled to do this,” he said. “Sometimes they attempt to say the client is in breach of the terms, with reasons that are suspect to say the least.”

More than half of the respondents to Mishcon de Reya’s research said their biggest issue with their lender involved attempts to increase margins on loans, while 41 per cent identified additional fees.

The law firm also found that investors – private equity and hedge funds – were more pessimistic about the lending environment than companies.

Companies also complained that banks are unwilling to negotiate.

Mr Zabeti said: “Sadly, too often the approach adopted by banks is “our way or no way. There appears to be a general perception that the banks are all-powerful, their documents are perfect and therefore there is no alternative to agreeing to the banks’ ‘way’. As such, I suspect that the expectations of borrowers are quite low.”