Last week Scott Maybury went to see a man about a £30,000 loan. He didn’t want to borrow the money himself. Scott is chief executive of Private & Commercial Finance Group (PCFG). His interest was in lending this sum.

The man he went to see was perplexed. ‘Last year I arranged a £30,000 loan from Nat West,’ he told Scott. ‘I have paid it back, with interest, and never missed a deadline. Now I have asked Nat West to renew the loan – and they have said no. What have I done wrong?’

The answer is nothing, but this story is an illustration of why the banks have become so unpopular with businessmen and politicians alike. Things will improve, I am sure, over the course of the next year. But for now the frustrations of borrowers are playing into the hands of companies like PCFG.

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Almost a year ago I wrote a Penny Sleuth about this AIM-listed finance company. For the subject line I used a quotation from the now deputy chairman Tony Nelson, who described this time as ‘The Golden Age of Lending.’ I was keen to meet Maybury and find out whether this description still applies.

An opportunity to fill a gap in the market

The answer is broadly yes – not that you would know that from PCFG’s share price. As one of the few remaining lenders to small businesses and used car buyers, it received more loan requests in October than in any previous month in its history.

Competition has retired from the battlefield. PCFG lends money to consumers who want to buy mainly second hand cars, and to small businesses to buy vehicles and equipment. It has traditionally competed with outfits like Blue Motor Finance (owned by Merrill Lynch), Park Motor Finance (owned by Credit Suisse), Universal Leasing (owned by Goldman Sachs, ABN Amro and Munich Re) and subsidiaries of the failed Kaupthing and Landsbanki banks.

One by one such lenders have simply decided to stop doing business. There is no attempt to discriminate between good customers – such as the man visited by Scott Maybury – and bad. As I wrote in the November issue of my newsletter, Red Hot Penny Shares, most lenders have become faceless organisations with a form-filling, credit-scoring mentality. So if somebody at Head Office decides that there will be no more lending then that is that.

PCFG, though, is still very much in business and is doing its best to fill the gap in the market. True, it is likely to see a rise in the number of its customers defaulting on their loans and it is wary of the falling value of the second hand cars that provide security. But it is reacting not by ceasing to lend, but by tightening its criteria and charging more.

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If Alastair Darling wants to know why all of his interest rate cuts are not feeding through into the economy, then here is the reason. A year ago PCFG would pay LIBOR plus 1½% for the funds that it borrows from the banks – making a total of about 7%. It would then charge its customers 15%. Today PCFG is being charged LIBOR plus 3% – so it is still paying 7% for its funds. But to allow for the probability that it will have more bad debts to write off, it is now lending money out at 18%.

Why banks will have to start lending again soon

So borrowers are finding that finance has become harder to get, and more expensive. But the situation should ease next year. Forget haranguing by the politicians. As I have said before, banks are in the business of lending and if they don’t lend they cannot make any money. And since the average loan in this sector lasts for two to three years, the book of existing loans will soon start to shrink and, sometime next year, financiers will realise that if they do not get back into the business of lending they will be writing their own redundancy note.

That means, of course, that PCFG will no longer have the field to itself. But still, a sense that the small business sector is not disappearing down the abyss should help its share price. Now trading at 12.5p it values the company at just £3.6m – barely half the value of its net assets.

This is definitely one to watch in 2009. It could be one of the few companies to prosper from the credit crunch.

And with that, I wish you a very Happy Christmas and a very prosperous New Year. I’ll be back with the next Penny Sleuth on Tuesday 6th January.

Best wishes,

Tom Bulford
for The Penny Sleuth

P.S. In my recent in-depth research, I’ve found three possible penny share “bounceback” candidates and written then up in a special report for you. Check them out and secure a risk-free trial to my Red Hot Penny Shares service. I firmly believe this is one of the most exciting times in living memory to be a penny share profit investor – and this is just the beginning. Get my 2009 “bounceback belters” report by clicking here now.

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