It’s no secret that despite political pressure, super-low interest rates and improving bank balance sheets, it’s still a job and a half to get a business loan on decent terms. The banks themselves admit that lending criteria are stricter than before, while entrepreneurs all too frequently meet with a warm reception at their branch followed by a cold shoulder from an all-powerful but unseen credit committee. With this in mind, we’ve spoken to banks and entrepreneurs who have been successful in securing a loan. Here are their top tips on how to get the answer you want.
1. Don’t give up before you’ve tried
According to banks, the reason that business lending isn’t rising in leaps and bounds is a lack of demand. To many entrepreneurs, that just doesn’t ring true, but Shafiq Khan, a partner at accountancy firm Clough, says that there is a genuine desire to lend among the big players. ‘At the moment, the banks have a lot more money to lend than before,’ he remarks. ‘They are a lot keener than when the recession hit, and they now have high targets and internal pressure to lend more.’
The banks agree. ‘The issue is lack of demand,’ says Mike Conroy, HSBC’s head of commercial banking. ‘There are plenty of funds available, but you can only lend to those who ask. At HSBC, we approve 80 per cent of all applications.’
2. Have facts and figures to hand
‘The businesses that spend time analysing their logistics and forecasts rarely have a problem securing investment,’ says Ian Stuart, managing director of Barclays Corporate for the UK and Ireland, adding that cash flow is a key area to get right.
‘We do expect clients to be better prepared than ten years ago.’ Kevin Barratt, MD of refrigerator specialist Cooltherm Installation Services, who secured bank finance for a buy-out of the business six years ago, confirms that the banks’ criteria are now more stringent. More recently, he has employed a consultancy to help tighten up his business plan and cash flow forecasts. ‘You need to provide a professional business plan, management accounts and order books,’ he counsels.
3. Develop a relationship
Whether banks are prepared to invest the time in building relationships is a vexed question among entrepreneurs. Charlie McVeigh, managing director of small pub group The Draft House, thinks not. ‘The bank manager doesn’t have a huge say, even though he is the only one who has met the team and put up the recommendation. Once a proposal goes to credit control, they just punch the numbers into their template, and if computer says no, computer says no.’
But Stephen Pegge, Lloyds TSB’s head of external affairs for commercial banking, denies that the decision-making process has become totally impersonal. ‘We have bank managers who can lend up to £500,000 on their own authority at 500 locations across the country,’ he says. McVeigh does concede, ‘If you can find a bank manager who has been around for a while and knows the system then you have an advantage.’
4. Shop around
Even banks advise you to check out what’s on offer elsewhere. ‘Businesses should shop around the major banks, and there is a right to appeal if you don’t feel you’ve got a good deal,’ says Pegge of Lloyds TSB. Will Davies, co-founder of property maintenance firm Aspect, strongly advises business leaders to put self-interest before loyalty. ‘Companies have to play banks off against each other,’ he says. ‘If you sit with one bank, they will do what they can to be restrictive. Only if banks think they’ll lose a client do they offer a better deal.’
Duncan Cheatle, who runs business network The Supper Club, says smaller operators such as Metro Bank may be worth looking at. ‘The smaller banks are looking at things in a fresher way, rather than sending everything through the credit committee,’ he claims.
5. Be open
The more you share both bad and good news with your bank, the more likely they’ll be able to help. Says Conroy of HSBC, ‘You could have a business that changes its terms of trade: for example, they start receiving payment from a supplier in 35 days when it used to be 14. Instead of talking to the bank they soldier on and exceed their overdraft limit – then they end up damaging their credit score.’
Likewise, it’s best to be frank about what you intend to achieve with the money. Barclays’ Stuart remarks, ‘My advice would be to engage with relationship directors and make it clear what your business wants from the partnership – whether it’s an acquisition, site development or export push. The more information we have, the better we can understand a proposition.’
However, there is another side to this coin, according to Davies, who warns that banks may take a different view on how much money a business needs to achieve its goals. ‘If they think you don’t need £400,000 to achieve your forecasts over the next 12 months and can survive on £200,000, they’ll give you the bare minimum.’
6. Consider different kinds of finance
Pegge of Lloyds TSB says, ‘Some businesses are hard to support with traditional loans and overdrafts, but different kinds of finance might be more appropriate.’ He mentions trade finance for companies with significant exports and invoice finance for fast-growing businesses.
Another bugbear of the banks is being asked to take an equity-level risk but accept a debt-level return. Cheatle observes, ‘Some companies are naive because they complain that loan rates are too high, but their businesses offer no security and are too risky. They need to raise equity finance and not debt.’
Conroy at HSBC agrees: ‘Banks make a small margin, and risk and reward are finely balanced – people must realise this.’
‘Companies have to play banks off against each other. If you sit with one bank, they will do what they can to be restrictive’