My own cynical view of business lending was always that banks are only prepared to give you an umbrella when it’s not raining and they quickly take it back when there’s a shower.
I speak as someone who started this business with a few grand of savings which I had hoped NatWest would match, but they didn’t because they wouldn’t believe the business plan – fair enough.
Short story long, but as we grew the bank kept offering us money and we kept taking it. One day they said they wanted it back – well at least £300k of it - and we had to sell our way out of a sticky situation…oh and use the house as security. Then we got lucky, sold to Carphone Warehouse and vowed never to be in that situation again. Today we are profitable, cash generative and not beholden to the banks.
It was a big lesson learned over a seven year period and one that resonates with dozens of the e-mails I’ve received on this subject since canvassing opinion earlier this week. Some of the responses have offered a technical explanation, others are a bit of a whinge and many are just expressing sheer frustration at the apathy of the banks. A couple of things have become really apparent to me…
In the UK we’ve created a culture where people are actively encouraged to start their own business, but there has also been a decade of ‘easy money’ with little or no security from the entrepreneur/small businessperson. The situation has changed and is now very similar to that of 15 years ago when I approached NatWest. The banks, which are businesses with shareholders after all, might be forgiven for assessing in more depth their exposure and becoming more risk averse.
Frankly there are some horror stories with shabby treatment of start-ups and early stage businesses, but equally an encouraging number of success stories. These are usually where the business plan is robust, a relationship with the lender has been established and crucially there is realistic security.
Several ‘early-stagers’ said that they’d actively courted the banks at business breakfasts and other networking events to build relationship and confidence in the same way they might with a prospective customer! It was also pointed out that if a bank is ‘presenting’ there is often a director around and therefore an opportunity to make a good impression.
If the banks still won’t lend to start-ups and early stage businesses, then there are still alternatives. Traditional routes such as savings and friends/family or Loan Funds such as Fredericks Foundation where you can borrow up to £20,000 – you even have to provide evidence of a bank refusal! (www.fredericksfoundation.org)
It is clear the bigger issue is with established businesses - large and small - who are struggling to re-finance or worse still are having a bank facility reduced or even withdrawn.
These include a £100m+ IT Distribution business with a D&B rating of 1 and top/bottom line growth of 18 per cent being forced to move from a longstanding lender which is reluctant to help them re-finance. One of the main issues in this case is the ‘extortionate’ arrangement fee (my own view here is that I can accept the need for a fee for a facility that may/may not be used but if its hard core lending why can’t the bank take the fee as it goes?).
Then there’s the long established business employing hundreds – this really is triple A – where re-financing £75m has attracted interest from most of the banks, all of whom have remarkably similar fees and rates! This is echoed by a construction business that hasn’t been hit by the downturn, has cash, but complained of ‘dishonest charging structures’.
Thanks also to ‘J’ who was recently told that his ten year old business was going to have its modest overdraft removed, to which he said, if you do that I’ll shut the doors and fly it into the wall! The bank compromised and halved his facility.
Two points came up time and again - the high nature of fees/rates and that they are suspiciously similar across most of the banks? A couple of people, both better qualified than me, suggested that the Ombudsman should be having a close look at this. I spoke to a banker about it and he said that this was all about remaining competitive whilst maximising the margin. What do you think?
The banks may be nervous about acquisition finance or fixed asset finance but they are supposed to be providing liquidity at a fair price that provides them with a return and the business with working capital. Surely established businesses with a good track record and excellent credit rating should be supported, as it is they who are driving the recovery and providing employment?
David Cameron told me some time ago that this is what his government wants to happen, but it isn’t, the evidence is in my inbox and on my voice mail. The banks are saying that they are supporting business, although one bank manager told me that they are not and probably will not until the government introduces guarantee schemes… isn’t this what they did a year ago?
There is some good news and it would appear that some local managers are more supportive than others – take a bow Dave Cook of HSBC who was mentioned in despatches a couple of times. I should also mention our current manager Greg, who has only ever been supportive, but then again we have no borrowings!
Generally the banks which didn’t need a bail out fared better than those that did and I’m told the technical reason for this is because of better capitalisation and stronger reserves. I guess they are also less likely to be accused of inappropriate lending – or put another way, they haven’t got form.
What does all this mean? Well, beyond the basics, such as realistic lending expectations and managing the cash within your business, clearly there’s a disconnect between Vince Cable (who says he’ll make the banks lend) and the banks themselves.
There is no doubt the economy is recovering and it would do so a damn site faster if cash rich businesses were supported!
I’m happy share the content of my inbox (after removing any references to the sender and the business) with Mr Cable if enough of you think it worthwhile. Alternatively we carry on as we are and the politicians and the banks can argue about what’s right for business without input from business itself!