Contaminated land: bank credit risk for small and medium size UK enterprises

With the implementation of the environmental legislation in April 2000 in the UK, the paper examines how provisions relating to contaminated land might affect loan decision-making by financial lending institutions to small and medium size enterprises (SMEs). The potential for a borrower or lender to incur liability for the cleaning up of contaminated land is now real. An insight into how banks assess contaminated land risk is provided, taking into consideration that environmental risk assessment today is becoming part of the credit approval process. Yet, banks seem more worried about reputation risk rather than default or security risks. Many SMEs may not be able to obtain adequate funding from banks when purchasing property or using it as security for loans because of contaminated land risk and, hence, their financial viability may be jeopardised. Though there is organisational pressure for SMEs to take into account environmental concerns, a radical change in their attitudes and practices is needed towards these all-important issues.