If the UK economy is going to continue to grow then access to finance will play a key role. This has led many SMEs to ask one very important question: do banks want to lend money to companies like mine?
According to British Bankers Association (BBA) over 90% of loans to medium sized entities were approved in Q2 2015. Whilst the statistics appear positive – are they really a sign that banks are once again keen to lend or is this a case of spin – which Evan Esar described as “producing unreliable facts from unreliable figures”?
Risks & reputations
It’s no secret that the banking world gained a very poor reputation following the 2007 economic crisis, with a lack of liquidity in money markets causing a knock on effect to SME lending. With the global financial sector in turmoil it became increasingly difficult for businesses, particularly SMEs, to identify funders that would be willing to provide loans even to relatively low risk opportunities.
The road to recovery
These financial institutions went through a series of stages which can perhaps be best described as “survival”, “strengthening of balance sheets”, ”positive talk but minimal lending”, “active but cautious lending to larger, more established companies” and “active but cautious lending to SME’s”. But what is the situation for SMEs looking for a loan today?
Open for business
The good news is that SMEs will find that banks and asset based lenders are more willing to lend to businesses than at any other point over the last 8 years. While there’s no set standard, and while the requirements will vary by institution, many lending protocols will be based on a similar set of principles which are designed to manage the risk exposure of the lender.
Some of the key factors that will be taken in to account by the potential lenders will include:
- Historic financial performance and forecasted financial performance. In particular profit, cash generation and predictability of future performance(e.g. long term contracts, strength of order book)
- Strength and experience of the management team
- Reliance on key customers and suppliers
- Security available
- What the cash is to be used for. Working capital will be looked on far more favourably than cash out to the owners.
“Risk capital” versus “working capital”
A critical question for a business to consider is what type of funding it is seeking, “Risk Capital” or “Working Capital”? “Working Capital” is something that all banks should be in a position to provide, subject to the opportunity being correctly structured and presented. “Risk Capital”, as its name suggests, carries with it a different risk profile and as such is usually more suited to funding through equity or mezzanine type finance. It is important you understand what it is you are really asking for.
It pays to be prepared
As with all things in life you only get one chance to make a first impression. Before commencing discussions with lenders companies should seek professional help to ensure they’re looking at the right funding options for them, and to maximise the chances of success. Getting this process wrong can result in you failing to secure finance or securing the wrong type of finance. Both of these outcomes are likely to have a significant adverse impact on the future success and value of the business.