Posted on 06.11.2013, by Rob Warlow

I often hear business owners say there is little help for them to get finance and yet there are a number of schemes out there. So why is it that the existing of the various schemes are not widely known?

This is one finding highlighted in a review on government finance support carried out by the Nation Audit Office (NAO). The NAO has concluded that despite a renewed focus by the government on the challenges facing SMEs in raising finance, there is scope for the range of initiatives to work towards a more unified offering.

The NAO found that schemes such as the Enterprise Finance Guarantee and Start-Up Loans provided direct support to around 5,900 firms in 2012-13, and whilst the schemes are generally performing positively it is felt the profile of the schemes needs to be raised.

The new Business Bank, which is due to be launched in 2014, will be the organisation to bring the schemes together but in the meantime more needs to be done to improve awareness.

The NAO also report found that, at present, although the Department for Business, Innovation & Skills (BIS) and HM Treasury both have teams dealing with ‘enterprise’ policy, there is no formal research programme joining the Departments with other departments, such as HMRC, all of which have an interest in SMEs.

In past blogs we have shared information on lending to SME from sources such as the Bank of England, British Bankers Association, the SME business barometer and yet there is no one single point of source.

It’s as in all things in life… you have to know where to hunt out the right information and of course BLS is one of those sources of information so keep reading our blog!

Posted on 04.11.2013, by Rob Warlow

Back in July in this blog we reported that RBS decided to request an independent review of its lending practices with the objective being to enable RBS to enhance its support for SMEs while maintaining safe and sound lending practices. With the review having been carried out the findings reveal that RBS and its subsidiary Nat West has much to do in overhauling its lending processes.

The investigation, headed by former Bank of England Deputy Governor Andrew Large concluded that RBS has not supported the SME sector in a way that meets its own targets or the expectations of its customers. It says that while RBS has started to address a number of the issues raised, further progress is needed.

The report identified a number of reasons for RBS failing to hit its lending targets, including:

RBS’s SME lending targets were at odds with its tougher credit standards, and the limits imposed on lending to certain sectors, for example lending to commercial real estate
Internal restructuring had led to lack of clarity as to which part of the bank was responsible for SME lending
There is a ‘risk adverse’ culture amongst its Managers and Credit Officers
The bank’s lending process is time consuming and loan applications take longer than at other banks
Credit skills of customer-facing staff, although improving, are not up to standard

Having an independent committee pull apart your business and highlighting areas of weakness is a tough message to take but RBS CEO Ross McEwan has accepted the findings and recommendations and has committed to take action. Looking at the findings I suspect that other High Street banks are guilty of many of these sins.

McEwan has committed RBS to the following key actions amongst others:

The bank will write to thousands more SMEs setting out clearly how much it is willing to lend to their business. It has already offered £4 billion of lending opportunities following a similar exercise earlier this year;
A dedicated website will be developed to show clearly what information RBS use to make a lending decision and set out simple, clear steps in its lending process;
The bank will begin work to enable bankers to make all but the most complex lending decisions in just five days of receipt of all necessary information;
RBS will ensure two thirds of its lending decisions are made locally and by sector specialists;
RBS will continue to invest in building the capability of its people with at least 90% of Relationship Managers and Credit Managers professionally qualified;
RBS will start a programme to make all customers whose loan applications are declined aware of the appeals process, and will continue to work with the Independent Appeals Chair to improve the support it provides to customers going though this process; and,
The bank will commit to pointing businesses to alternative sources of finance where it cannot support a loan application.

This is a big undertaking and RBS will on an annual basis publicly report on progress against these commitments. It will be interesting to see how they fare in addressing these issues given the mammoth task ahead of them.

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.