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.

SMEs should:

• Be fully aware that banks are only one of a number of possible
• sources of finance for their businesses;
• Be aware that banks’ lending portfolios will focus on different
• sectors at different times;
• Recognise that loan decisions will be made on commercial
• grounds, in particular the level of acceptable risk;
• Prepare a realistic business plan and seek expert feedback before it is submitted;
• Demonstrate financial acumen over a number of years;
• Learn from feedback in relation to loan decisions.

Banks should:

• Provide clear details of their loan criteria to SMEs;
• Outline how different factors, including credit history, will impact
• upon their decision making process;
• Provide clear, tailored, constructive feedback on their loan decisions.

Policy makers should:

• Address conflicting pressures in the banking sector, by reconciling
• current bank liquidity requirements with SMEs’ funding needs;
• Develop an independent and interactive online tool to enable
• potential borrowers to assess their ability to secure finance;
• Advance plans for the Government’s Business Bank to bring it to fruition as soon as possible.