Banks 'stifle food manufacturers’ innovation'

16-Mar-2012 - Last updated on 16-Mar-2012 at 17:10 GMT

British banks seem unwilling to lend food manufacturers the money they need to unlock innovation

British banks’ failure to understand the food manufacturing sector is choking industry innovation, warned speakers at a conference in London this week.

Banks’ lack of industry insight, coupled with the sector’s perceived high-risk and low, slow returns made them reluctant to invest, said Robert James, technical manager at fresh produce firm, Thanet Earth.

“The fundamental returns you see are sometimes not that exciting [at first],” and that makes bankers’ reluctant to lend money, James told the conference organised by the Department for Environment, Food and Rural Affairs (DEFRA). “The banks know they can get better returns by looking elsewhere.”

To finance new projects, James recommended searching for alternative sources of funding from European lenders. “European banks seem to be more interested [than British ones] in innovative projects.”

Needed finance

He highlighted Thanet Earth’s application to British banks for funding to exploit a gap in the market for UK-grown and packaged salad stuffs. The firm needed finance to build a packaging and processing facility, greenhouses and a combined heat and power (CHP) plant to heat the greenhouse while generating electricity for 60,000 homes.

But British banks would offer funding only to build the packaging facility. Thanet had to turn to European banks for money to build the greenhouses and CHP plant.

To finance further expansion of its greenhouses, the firm has once again had to rely on European banks, said James.

Similarly disenchanted with British banks, beef producer Arrow Valley Feeders was starting to source funding from private individuals to fund expansion, said owner, Adam Quinney.

It has been easier to persuade private individuals than financial institutions to back new projects.“If it wasn’t for the fact that we own some property, getting any bank funding at all would have been extremely difficult,” said Quinney.

Chris Warkup, director of the government organisation Biosciences Knowledge Transfer Network (KTN), agreed that persuading private individuals to invest in food chain innovation was a promising solution to overcoming the lack of investment from UK banks.

He also suggested that EU funding could be used more effectively by UK food manufacturers.

"The UK food industry also does not do a very good job at getting money out of EU frameworks for innovation. Many are put off by the paperwork and complexity of the application process, but KTN can offer help with it,” he said.

Meanwhile a committee appointed by the government has suggested peer-to-peer lending could take bigger share of lending market in future and help plug the funding gap of £190bn.

Compelling evidence

Leader of the committee, Tim Breedon, chief executive of Legal & General, said: “There is compelling evidence that access to finance is expected to become more acute as business confidence and growth returns, whilst continuing bank deleveraging is likely to leave a significant funding shortfall."

Giles Andrews, co-founder of Zopa, the UK's biggest peer-to-peer lending firm, told BBC Radio 4’s Today programme that peer-to-peer lending was more efficient than bank financing and had fewer overheads – in being a solely online business.

“We accept loans from as little as £10 up to half a million and lend only to prime borrowers,” he said. “We already have 2% of the personal unsecured loan market and expect rapid growth.”

Mark Hoban, financial secretary to the Treasury, shared his optimism. He is on record as saying peer-to-peer lending has the potential to match Google in size.

DEFRA's Innovate for Growth Summit took place in London on March 14.