BizSmart Select Member Ian Priest gives us the lowdown on the UK’s banks…
The mood music from the banks is very much that we are open for business, but the reality is that it is still immensely difficult for small businesses to get finance. The risk appetite in banks is very low. I have seen two cases recently where even though they would have been lending modest amounts, with good security, to millionaires (full personal recourse), certain banks have told me the “risk is too high”.
On the flip side there is still a reticence to approach banks for funding. Is this a consequence of lack of optimism among business owners, or a fear of being declined, or a general mistrust of the banks? Probably a mixture of all three.
Certainly bankers’ reputations remain in the gutter and the Tomlinson Report, which has shone a spotlight into more murky dealings, has done nothing to enhance their damaged public standing. The on-going issues with LIBOR fixing, PPI and interest rate swaps all add to the general distrust and banks must now make massive efforts to clean up their acts and rebuild trust. This constant drip-drip of bad news and criminal behaviour is having a toxic effect on the economy and delaying the recovery.
We recently saw a return to the high street of the TSB brand, which I have a great deal of affection for having been employed by TSB both pre and post the Lloyds merger. However, despite the much advertised “return to local banking” CEO Paul Pester told the Mail on Sunday that “lending decisions were best left to the central computers”.
Don’t get me wrong, the last thing we need is bankers returning to the good old, bad old days of easy credit supported by rising property prices, but for now the pendulum has swung too far the other way.
There are a number of reasons why the pendulum is still stuck at caution. The primary one remains that banks need to rebuild their balance sheets following the financial crisis which saw billions of bad debts and billions more wiped off property values that are still giving bankers nightmares.
The new rules on bank capital, designed very sensibly to make sure banks can survive future shocks, are a further depressant on their ability to lend, and as a consequence also make borrowing inherently more expensive. This potential increase in costs is partially being hidden by the Funding for Lending scheme. The changes to the capital requirements are also likely to fuel a drive by banks to switch away from overdrafts to some form of invoice finance to support working capital.
Invoice finance sounds simple and straight forward but the reality is it is a very complex product. Invoice finance can help the right businesses grow but it can equally be a nightmare for the wrong businesses. If Invoice finance is suggested – get advice.
One other major hindrance to small business lending is the lack of knowledge and experience on the front line. Lord Green, former CEO and Chairman of HSBC and now Minister of State for Trade and Investment, admitted at a conference in Birmingham last year that “the banks have spent the last 20 years deskilling”. Many bankers now are trained in sales techniques and not in the traditional banking skills espoused by the now vanished Institute of Bankers exams which rigorously tested a young banker’s skill on law, economics, accountancy, international trade, credit risk assessment and taking security.
Most bankers will openly admit they are under huge time pressures. It is not a 9-5 job, more likely 8-6 plus evenings and weekends, just to keep on top of the day-to-day demands for returns and progress reports that epitomise the management-by-results culture. This time pressure coupled with the deskilling means many proposals get turned down as “not one for us” when they may not have been properly considered.
To have the best chance of getting your proposal considered properly you need to:-
- Be fully prepared.
- Understand your market and the external influences on that market.
- Understand your own strengths and weaknesses and how you can capitalise on the strengths and minimise the weaknesses.
- Demonstrate that you have the skills to run and develop the business.
- Have realistic projections that are stress tested.
- Be able to demonstrate that you can meet the repayments even if interest rates rise or your sales fall.
Remember, at all times banks are not lending you their own money, it is depositors’ money and they have to be able to safeguard those deposits. Banks should only lend if they are satisfied that you can afford the repayments and that it is safe – that they can get the money back.
If you don’t have the in-house skills to put a full proposal to a bank then please seek some professional help. You only get one shot because once a bank has reached a decision it is extremely hard to get them to change their minds.
This article by Ian Priest also appeared in the Institute of Directors Regional magazine in January 2014. Ian was a banker for 31 years before joining Independent Banking Consultants. IBC uses its extensive inside knowledge of banks and banking to help businesses raise finance and, importantly, help them to keep that finance, on the right terms. You can view Ian’s Select Member Profile or give Ian a call on 07917 355751.