Posted on 01.11.2013, by Rob Warlow
If you’re in business today then there is no getting away from the message being heavily promoted that ‘banks aren’t lending’ or ‘banks are not interested in supporting small businesses’.
As with all messages, there are always two sides to the story. Regular readers of this blog will know that I have consistently argued that both banks and business owners have equally responsibility in making changes to get to that all too elusive ‘yes’.
The need for both sides to see each other’s point of view has been highlighted in a new piece of research carried out by chartered accountancy firm Kingston Smith LLP in conjunction with the Business Schools of the Universities of Surrey and Greenwich.
The research ‘Bank finance – lost in translation’ reveals a number of key misunderstandings between banks and SMEs which effectively put up barriers when to comes to lending to SMEs.
The findings of the research were based on face-to-face interviews with the senior lending policy makers at five major and challenger high street banks, as well as interviews and focus groups with SME owner/managers, so a well-balanced panel.
The report came up with four key findings.
SMEs’ perceptions of banks’ lending policies are more negative than they need to be
Since the start of the credit crunch the media has been very vocal about the banks’ perceived failure to lend and it’s clear that many business owners have been put off applying for finance because they assume they will be declined.
This negative assumption has been regularly highlighted in the quarterly SME Finance Report and the findings in this latest research confirm this perception is very much alive.
In previous blogs I have said that business owners can’t look back at the past and longingly hope for a return to those days when credit freely flowed. It’s just not going to happen – now is the new normal.
As in any aspect of running a business, persistence is the key. If you are knocked back, find out why, learn from it and make the necessary adjustments to your Business Plan and proposal.
SMEs would benefit from greater clarity regarding banks’ loan application processes
The research found that many SMEs are unaware of, and don’t understand, banks’ loan application requirements.
This finding is focused mainly on access to information on what banks want to see in order to process a finance request. Bank websites on ‘how to apply for a business loan’ were found to vary in effectiveness and ease of navigation thereby putting another barrier in the way of doing business.
SMEs are often unaware of banks’ lending criteria
Perhaps not unsurprisingly SMEs feel that the bank’s loan request assessment process is a black art, something of which they have little understanding.
For example many SMEs are unaware that banks expect them to invest in their own businesses and make a contribution to an overall project cost by injecting a percentage of the funds required. This ‘partnering in the risk’ extends to the provision of some form of security for the loan, whether that be property or director’s personal guarantees.
SMEs also need to be more aware that some banks favour one sector whilst another is less keen to lend into that industry. Where does your bank sit in relation to your sector?
The banks interviewed said they only make loans to SMEs which are considered to be commercially viable and SMEs can improve their chances by demonstrating both a convincing business idea and financial acumen.
The lack of understanding about how banks thinks has been a central theme is all my blogs and videos and was the key reason why I wrote ‘Loan Sharp: Get the Business Finance You Need’.
As in any negotiation, to be successful you need to understand how the other side thinks.
Subsequent to the loan decision, banks’ feedback and support offered to SMEs is often unclear and inadequate
The report is not totally biased towards the banks; one area of criticism levelled at the banks is how they feedback a ‘no’ decision. Whilst the banks said they do provide reasons as to why they are not supporting a request the general consensus amongst business owners was that this is not the case.
I have certainly seen examples of this and banks certainly do need to be more specific in why they are declining a request for finance. If vague reasons are given then it’s more challenging for the business owner to make the necessary changes to convert the ‘no’ to a ‘yes’.
The recommendations coming out of this piece of research is an excellent summary of what both SMEs and banks can do to come closer together.
Policy makers should:
Rob kindly agreed to attend the recent Pontypridd RFC sponsors networking evening and delivered what can only be described as an excellent talk on 5 Tactics to Boost Your Business and Your Profits. He kept the audience engaged throughout and the feedback from everyone was excellent. Rob is very knowledgeable on business and finance and on top of that is a genuine nice guy. We hope to have him back at a future event and I have no hesitation in recommending Rob’s services.
Hi Rob, it was so interesting and entertaining listening to you at the Kevin Green Wealth Coach Workshop in Reading this weekend! I didnt realise you can find Finance proposals such fun!. Brilliant tips! Thanks.
Further to your recent presentation at LEAD Wales just wanted to say it was very refreshing to see somebody talk passionately and positively about finance, very insightful!
I wanted to thank you for such an insightful, energetic, and entertaining talk at the Kevin Green Wealth event on securing funding and creating a successful plan. It was brilliantly executed and a pleasure to listen to and the ideas I’ve learned are definitely going to help me in going forward.
Rob delivered a series of 3 workshops aimed at understanding how finance houses look at finance propositions with the aim for us as a team to deliver more of a bespoke offering to our customer base. The training was delivered to a mixture of staff who work with new businesses start-ups and existing established businesses across Mid & South West Wales. Rob delivered the training with an abundance of passion and has really helped my team look at financial propositions in a different light, many thanks again Rob and I look forward to work with you in the near future.