By Rob Warlow, Business Loan Services
A recent survey carried out by the Forum of Private Business has revealed an interesting insight in to how business owners currently view the issue of obtaining bank finance. Whilst a large portion of blame for the drought in the availability of business finance lies at the doors of the banks, business owners have to take some responsibility and start playing their part.
No one can fail to have noticed an almost daily flood of surveys and comments on how difficult it is to get support from the banks — the words ‘blood’ and ‘stone’ are often used in the same sentence. In fact the most recent figures from the Bank of England show that in the three months to May 2012 the total lending stock shrank by £3b and this contraction in lending stock is a trend which has been evident quarter-on-quarter. Given my day-to-day interaction with business owners looking to raise finance I know how tough it can be to get the bank to see the potential in a deal.
However whilst banks have to up their game in the provision of finance, business owners must also do their part — there is an element of joint responsibility which, to a large degree, is lacking. The banks can certainly be accused of being overly negative but undoubtedly they are seeing warning signs that many business owners are blind to.
So what does the FPB survey reveal? When small businesses were asked why demand for bank finance was apparently so low, 61% of respondents reported they had received signals from banks that they were not prepared to lend … so based on this perception they did nothing. Recent research contained in Hilton-Baird’s SME Trends Index Report revealed that 39% of businesses expect to expand over the next six months. With the majority of business owners not contemplating visiting the bank how are they going to fund their growth plans?
Sitting back and listening to the ‘word on the street’ is not the way forward. We all know that perceptions don’t necessarily reflect reality but if we all take what we hear as truth in terms of access to finance then we’ll get nowhere. Growth, either at the company level or for the economy as a whole, is not going to be achieved if we take talk at face value, sit back and do nothing.
As a business owner you need to be bold by taking the first step of getting in front of the bank and requesting what you need. It’s only by taking that leap can there be a better understanding of the gaps the bank is seeing within your proposal or business. Armed with this knowledge your Plan can be amended, improved upon and resubmitted to either the same lender or another institution which may be prepared to listen.
When comes to raising finance if 60% of business owners are prepared to do nothing then perhaps it’s not the banks we have to blame but instead our own inertia. Perceived obstacles are a justification for not doing anything which results in comforting ourselves by blaming the obstacle (i.e. the banks) for why we don’t get what we want.
But as I’ve said, there is fault on both sides, so what can business owners and banks do to ensure a mutual ‘meeting in the middle’?
What Business Owners Can Do
First of all, accept the new reality.
The rules of the game have changed and we are not going back to the days when credit was made available merely by just asking. I often hear business owners saying they want things to get back to normal … but understand this, where we are now is normal; it was the boom period that was abnormal. Banks had thrown common sense out of the window and they have now returned to the more traditional methods of credit assessment — do you have the skill set to deliver on your plan? Do your numbers stack up? Have you proven your market? Can you comfortably afford to service the increased debt?
If you don’t know the factors banks consider as part of their credit assessment process then resolve to find out.
The next action you can take is to provide the bank with all the information they need; if you don’t, then you are practically inviting a ‘no’ response. Take this example. I was recently called by a company asking if I could assist following a refusal by their bank to grant an overdraft facility. After the usual ‘banks are not helping businesses’ rant I asked what information they had provided to support their request; the five second pause followed by the sheepish comment, “Well, nothing; we just called up our Bank Manager and asked”, said it all.
So what do you need? A Business Plan; up to date Financial Statements; latest Management Accounts; financial projections; details of the security you are prepared to offer; and, if you’re a small to mid-sized business, details of your personal financial position.
What Banks Can Do
The various schemes put in place by the government to encourage the banks to lend have clearly not worked. And why would they? The banks see risks within the proposals in front of them and the key is how these risks are managed, not the provision of cheap funding. However, banks do have their part to play so what can they do?
Firstly, the banks need to do more to educate their customers on the information they are looking for in order to carry out a robust credit assessment. Let’s take the example I quoted earlier of the company who were declined the overdraft facility. Why wasn’t the Bank Manager more proactive by pointing out that he didn’t have sufficient information to process the request? Why didn’t they educate the company as to what information would be needed? This perceived unwillingness to guide their customers is a key area for banks to address.
Secondly, when a request has been declined the banks need to be more transparent as to reasons why they felt unable to support. Too many business owners I interact with fail to understand the potential risks or issues the bank has spotted or are concerned about. This lack of understanding results in a limited number of actions being taken, or in some cases, no action being taken at all, in order to correct the problem or mitigate the risk. The lack of transparency by the banks perpetuates the ongoing failure to support those businesses in need of finance to fund growth.
The key message for business owners is to not let the perception that banks aren’t lending put you off applying. From the banks’ perspective it about being more transparent about what they are looking for. Get these aspects of obtaining finance right and we may just see some progress.
Rob Warlow helps business owner’s deal with their banks to obtain funding or to assist in re-building damaged client-banker relationships. Rob is the author of ‘Loan Sharp: Get the Business Finance You Deserve’ which is available on Amazon or via his website, www.businessloanservices.co.uk