By Max Clarke

Small businesses are responding to lenders’ criticisms that they are not submitting proper management accounts by providing better financial information establishing they are creditworthy concerns.

With banks apparently moving away from security -backed lending towards regular analysis of businesses’ abilities to meet their liabilities, the Forum of Private Business has joined forces with CreditPal to provide a free, up-to-date financial management service to its members.

Leading banks have repeatedly told the Forum that information submitted by SMEs is often unclear and confusing, making it difficult for them to properly assess lending risks on a case-by-case basis.

In turn, many small business owners have reported that they are being rejected by lenders purely because of their size — or more often that their sectors are deemed ‘no go’ areas for lending.

As part of the Forum’s Finance Director business support solution, the not-for profit organisation is helping its members to produce and present proper financial and management information via its free ForumCreditPal service.

Using ForumCreditPal, which uses the latest, highly secure web technology, small businesses can upload their financial information, automatically prepare and present profit and loss balance sheets and two-year portable credit histories in the format banks require and send this information directly to selected banks, minimising the risks of their lending applications being rejected and saving them time and money.

“In recent years something of an impasse in bank-business relationships has emerged and it is important that we bridge that divide,” said the Forum’s Chief Executive, Phil Orford.

“The banks must do better — that is clear — but we are working with our members to provide the technology and financial skills they need to proactively establish their creditworthiness.

“With banks moving towards requiring regular — meaning quarterly or even monthly — financial reporting there are obvious cost increase implications for small firms. ForumCreditPal empowers them to produce and present their management accounts in the right way and for free.”

ForumCreditPal has been designed to complement existing accounting packages. Backing the service, Steve Porter, Marketing Campaign Manager at Sage Accountants’ Division said:

“ForumCreditPal complements Sage software — such as Sage 50 Accounts and Sage 200 — requiring no extra download or installation, and allows users to review internal finance and automatically generate standardised and validated monthly management accounts.”

“Accountants can offer such credit and analysis tools as a value-added service, generating data on a client’s behalf, or acting as an advisor to help SMEs access and set up the service in-house.”

Research carried out by the Forum last year suggests that the credit crisis stimulated firms into better financial management practices. In all, 68% said they had been motivated to produce management accounts — with 85% of these citing the reason for doing so as ‘improving business management’.

With more than £24 billion currently owed to SMEs across the UK in outstanding invoice payments, producing regular financial information and establishing proper credit reporting can also help bolster business finance by allowing entrepreneurs to keep on top of late payments.

The survey showed that 31% of respondents also identified credit checks as the most effective method of monitoring their supply chain.

However, despite efforts from businesses to provide the financial information banks, invoice financing organisation and other lenders and providers of credit are seeking when determining lending applications, there remains considerable scepticism about banks and of the merits of sharing financial information more generally.

Just 9% said they would be prepared to fully disclose their management accounts to their supply chain and fewer (8%) prepare financial reports explicitly to improve their own credit rating with lenders.

Turned off by their banks, business owners said they would turn to their friends and family instead. The finance expected to come from these internal sources increased significantly from 10% in 2010 to 45% in 2011.

“Given the tough economic climate we are in and continuing credit restrictions, it is perhaps inevitable that entrepreneurs are seeking funding from friends and family, but on its own this is an unsustainable approach to starting or growing a business,” added Mr Orford.

“Banks clearly have a major part to play in financing a private sector-led economic recovery driven by small business growth and job creation. How they will do that is the key question.

“Lenders simply must review their risk criteria and be less punitive by refraining from assessing viability purely based on a firm’s size or sector. Banks must now back business owners’ efforts to proactively establish their creditworthiness by providing reliable, up-to-date financial information, which is what they have been calling for a long time. It is time for businesses to put their banks to the test.”

Mr Orford concluded: “The importance of being adaptable in a changing financial world and embracing technology to achieve this should not be understated. We are working with entrepreneurs to this end but lenders must also commit to being innovative and flexible with the services they provide to small business owners.”

The Forum is a driving force behind the new Doing Business Together (DBT) initiative, which aims to bring together businesses and banks in the spirit of communication, transparency and information sharing.

The Forum is hosting a DBT grassroots event on Friday, 25 February where business owners will be able to put questions directly to their banks and British Bankers’ Association (BBA) representatives. The Chancellor of the Exchequer, George Osborne, will be the keynote speaker.

At the event, the business support and lobbying organisation will survey delegates to provide further intelligence about bank-business relationships and perceptions of the importance of credit control procedures and other financial information.

Backing the initiative, Business Secretary Vince Cable said: "Doing Business Together is a fine initiative for getting business and finance institutions on the same page.

“There is too much misunderstanding and even mistrust between banks and their clients, which creates a barrier holding back firms, banks and the wider economy. The Operating Principles of DBT describe how this barrier can be broken down by taking a few clear, common sense steps. I regard DBT as a valuable initiative and wish to see it expand and develop."

Speaking in his position as Chairman of the BBA Small Firms Advisory Panel, Lloyds Banking Group Commercial Head of External Affairs Stephen Pegge said:

"Banks, business groups, accountancy bodies and other parts of the credit industry have worked closely together in the interests of SMEs to encourage and enable better access to and use of financial management tools that can improve business performance and ability to access credit on the most competitive terms.

“As recovery takes place, it is critical that SMEs are financially well managed and they can present the right information for lenders and other business support professionals. It is also vital that banks will do all they can to support this, as committed within the report of the Business Finance Taskforce.”

ForumCreditPal is one of a range of financial support services provided by the Forum that include access to the innovative multiple private investment and risk sharing platform Funding Circle, and also Funding Store.

The Forum is lobbying to help firms access finance via its Get Britain Trading campaign, delivered by the organisation’s Communications Director business support solution.