smallbusiness.co.uk: Helping your business think big

So why aren’t banks lending to small businesses? Rose Lewis, a partner at financial consultancy Pembridge Partners, outlines what banks want to see from SMEs before agreeing to show the money.

Bank lending to small businesses remains the hottest of topics. So what can an owner-manager do to convince a bank that their business is worth backing?

The bottom line is that a bank will always look for the following:

• Security against an asset and the best assets to have are inventory and/or property;

• A good trading record, both past and projected. Also, if your customers are solid businesses and you have a good debtor book, the bank could look to lend against it;

• A well-written business plan* that makes you look professional. This doesn’t need to be long, but it needs to be able to explain the business and make sense in financial terms.

Always go to the bank and get a facility before need support because when you do need it urgently, it will always be harder to get. Banks are risk averse and focusing on profit more than ever – it’s easier to gain financial support for growth rather than for survival.

When it comes to start-ups and small businesses, banks have never been champions of risk capital. A bank is likely to turn you away** if:

• You have bad credit history or no credit history;
• You lack assets and lack recurring sources of revenue;
• Your businesses is not scalable.

The lending terms are undeniably strict at present. A survey by the Institute of Directors in July 2010 claimed that one in three firms applying for debt finance in the time period 1 January 2010 to June 2010 were declined by their bank. The survey also showed that the lending criteria has become more restrictive with regards to the amount of security requested by the banks.

Certainly banks are getting tougher with would-be borrowers, as Peter Ibbetson, chairman of business lending at the Royal Bank of Scotland said recently in an interview, where he insisted that his institution was right to go over the books of companies like never before, given the current economy.

It’s appropriate that banks ask companies for their business plans and forecasts as well as their businesses financial performance history. That’s as much for the benefit of the business and its growth as it is for the bank.
The banks will no doubt protest that the likes of business secretary Vince Cable are telling them to be far more prudent while at the same time telling them to lend much more. But banks have always been prepared to support viable businesses and they do have money to lend.

It depends on whether a business can demonstrate that it is ready for financial investment and has real growth potential.

Pembridge Partners LLP provides finance and advice to businesses primarily in the media, marketing and technology sectors. To find out more, click here

*For more information about business plans, click here

** To find out more about start-up finance, click here