Raising Finance

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Banking on it: The truth about SMEs and bank lending

7 Mins

Addressing the vexed question of bank lending to mid-sized and smaller businesses at Real Business Funding are: Conrad Ford, CEO of Funding Options; Irene Graham of the British Bankers’ Association; Bev Hurley, award-winning CEO of YTKO; Matthew Jaffa of the Federation of Small Businesses; and Stephan Caron from GE Capital.

The major high-street banks (HSBC, Lloyds, RBS and Barclays; now with Santander joining the party) are regularly berated for not lending to SME businesses, eager instead to shore up their own (now closely scrutinised and regulated) balance sheets. And there seems little doubt that the “contract” between business and their finance providers has changed: loan application rejection rates have soared from five to six per cent in 2004 to 20 per cent plus in 2012.

That said, the market has changed. Major overseas lenders (such as the Icelandic banks) have left the UK market. Consumer and business confidence has dipped, making businesses’ revenue projections less reliable. And many new finance-providers have entered the market, offering a range of non-traditional finance to SME businessses. The era of the overdraft seems finally to be over.

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Conrad Ford on stage now, looking at the data around bank bashing. In 2011, 53 per cent of lending created by big five banks. 2012, exactly the same percentage. Crowdfunding is less than one per cent of market activity at the moment. Asset finance and invoice finance has stayed open during recession; challenger banks are growing very fast; overseas banks are the single biggest driver of the lending market. There’s more than 30 commercial mortgage providers, but most of us don’t know who they are or how to approach them.

There are advisory services out there. Accredited accountants are the most trusted source of advice among SMEs.

For Funding for Lending, we need more focus.

Says Ford: “And this is the tragedy: it is actually the growth firms that are suffering most. The banks and the lenders really need to up their game.”

After Conrad Ford’s very insightful presentation, the panel is about to start.

Bev Hurley says we’re seeing a return to old fashioned things. “Money isn’t an end to itself; it has to grow your business. And that comes from selling stuff. For us it’s about de-risking the proposition, by validating who is going to buy from you, how much, and how often. Then you can make realistic financial projections. You still have to do that basic process of taking risk out.

Matthew Jaffa: “In terms of the interest rates for bank lending, the Funding for Lending scheme Is actually about to kick in. However, in terms of accessing finance, we still see about 40 per cent of businesses being refused. We don’t see it as a case that the banks should be removed altogether, we just want to see more alternatives coming to market. More mentoring is vital, and more accountants to help businesses become investment ready.“

Irene Graham: “It’s really critical that a business understands the cashflow and proves through that the ability to pay back the finance. It’s very important to make sure that every business looking for finance can afford to pay it back. Cashflow shows your strong growth, and a buffer, for paying back the loan.

“Only ten per cent of businesses take any form of professional advice when they’re looking for finance. We do need to find a way where businesses feel comfortable looking for that support externally. Through accountants, or mentoring.”

Stephan Caron: “Providing finance is very much about providing the right kind of finance for the right kind of business. Decision technology is going to change the finance landscape. A lot of companies have historically relied on banks for finance, and now there’s a need to raise awareness of other sources of finance.

Conrad Ford says the issues and challenges are fundamentally different between small, mid-sized, larger businesses. “Micro-businesses have a very wide range of choice; there’s always options. As long as you know where to go to. The challenge becomes growing businesses who have working capital needs. Banks are not very good at lending against intangible assets. One of the great challenges is businesses who are trying to turn around their organisation, and have a plan, but banks aren’t willing to finance a business that has recent losses. That’s probably one of the gaps in the market. It’s about finding the right products, and knowing where to go.”

Irene Graham says that £400bn of lending goes out to UK businesses today; £6bn of new lending coming from banks goes to SMEs every quarter. “They’re lending asset finance, overdrafts, export finance, across the spectrum. I agree that it’s about the right finance at the right time. We have traditionally been reliant on bank finance as the only form of finance. In the US, there’s a lot more equity finance. When you’re a startup, equity often is the right form of finance.”

Bev Hurley says that robust cashflow projections are what any investor will want to see. “The thing that generates good cashflow is customers. I would look for advice from my market base. That part of the business proposition is slightly different from the business plan; investors want to see who you are going to sell to. That’s the compelling bit all businesses have to go through. Investors will be really impressed if you can tell them, ‘I’ve spoken to these people, they want ‘x,y,z’ and I can sell it to them.’”

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