By Marcus Leach

Kingston Smith launched their newly commissioned research into the accessibility of finance to small and medium sized enterprises (SMEs) at Google Campus today (Thursday).

The report, Bank Finance - Lost in Translation, was carried out by Professor David Gray of the University of Greenwich Business School and Professor Mark Saunders of Surrey Business School.

The topic of finance within the small to medium-sized enterprise (SME) sphere is a contentious one. Banks claim that the businesses are to blame for a lack of lending, and hardly surprisingly, the businesses say the banks are to blame. However, in reality there is a mutual incomprehensibility.

The professors presented their findings, stating that in the last year only 25% of SMEs have actively looked for finance, and yet there is such a negative air from many when talking about banks and lending. 'Banks are very loathed to tell you anything' and 'banks do not want to lend to small businesses' were just two of the responses.

The report suggested that SMEs would benefit from greater clarity regarding banks' loan application processes, as many are unaware of the thought process that banks go through whilst considering the loan. The bank thought process can be summarised as such:

Character of the applicant
Ability to repay loan
Means to repay
Purpose of loan
Amount of Loan
Repaid how will loan be repaid
Insurance of security for the loan

The report concluded that SMEs and those who provide them with finance are in a new era with new norms for lending and borrowing and new expectations of what level of risk is acceptable.

Key Findings

Key finding one: SMEs’ perceptions of banks’ lending policies are more negative than they need to be.

1. Many SMEs perceive bank lending policies to be more negative than they actually are and so do not seek finance.

2. Bank lending is more internally regulated than in the past, with banks now required to undertake more due diligence. Although banks are lending to SMEs, bank funding has adjusted to a new, lower, post-2008 norm.

3. SMEs’ negative perception of banks is influenced by the media.

4. Traditional banks should consider improving their accessibility, for example by extending their hours of business.

Key finding two: SMEs would benefit from greater clarity regarding banks’ loan application process.

1. Many SMEs are unaware of, and, do not fully understand banks’ or other providers’ loan application process, including the need to share the financial risk.

2. Banks’ web pages for business loans (for SMEs) differ markedly in their ease of navigation.

3. Banks differ as to whether SMEs are required to have any face-to-face contact with a bank representative during the loan application process. Some personal contact is generally preferred by SMEs.

4. Some banks provide a checklist of the information required for a loan application.

Key finding three: SMEs are often unaware of banks’ lending criteria.

1. For the majority of SMEs, each bank’s lending decision criteria is a black box, about which they have very little knowledge of its contents.

2. Many SMEs seem unaware of the need to have both a good credit rating and the need for a realistic business plan, showing growth projections and a sensible level of borrowing linked to a clear purpose.

3. Bank lending decisions are made on the basis of a commercially acceptable risk. This comprises two key aspects: firstly, the extent to which the business idea is convincing (as opposed to poor) and, secondly, the quality of financial acumen. In particular evidence of the SME’s ability to make good (as opposed to naïve) judgements based upon experience.

4. SMEs that can build convincing business plans that demonstrate genuine market potential but are let down by poorly informed financial planning are ‘good misses’ because, with help and better business advice, they can be funded.

5. All bank lending decisions involve a considered assessment of available data against criteria rather than just a mechanistic “scoring system”.

Key finding four: Subsequent to the loan decision, banks’ feedback and support offered to SMEs is often unclear and inadequate.

1. Where banks had refused to offer an SME a loan, they stressed that feedback was given and that the SME had the right to reapply for a loan

2. Subsequent to loan decisions being made, SMEs, however, feel that feedback from banks is lacking even where applications have been successful.

3. Some SMEs consider banks are not qualified to support them. In contrast, some banks consider this is not their role, arguing that such support is better provided by third party specialists.

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