Along with ‘Britain doesn’t make anything anymore’, the phrase ‘banks don’t lend anymore’ is one of the most commonly heard, and most misunderstood, sentiments in the business world.
It is true that since the 2008, banks have been more wary of lending. The memory of the financial crisis – caused largely by risky lending – combined with higher liquidity and capital requirements, have made for a far more risk adverse approach.
But banks ARE lending, and they are very keen to do so more. They are lending less than they used to, but the idea that they won’t lend to anyone is simply not true if you submit a well structured, quality application.
The myth is not only hurting the banks, but hurting businesses. Because we hear so many scare stories of long loan application processes that often come to nothing, many established businesses with good propositions don’t bother applying for funding to develop them. Others will get one rejection and assume they fall into the ‘do not lend’ category, and give up – whereas in a more optimistic climate, they might keep trying. This is stifling business growth and therefore growth of the whole economy.
Why is everyone saying ‘banks aren’t lending’?
Of course all these stories of loan rejections do come from somewhere. Some applications simply aren’t a backable proposition and others may be down to specific factors, such as sector based decision on lending by banks, but some are rejected because the business themselves don’t submit correctly prepared applications.
We should also look at the change in recent times to the way larger banks generally make lending decisions.
Years ago, when local bank managers had the authority to approve loans, businesses could apply to just one person –“the bank manager on the corner” – who would have had extensive local knowledge and contacts. He or she would be familiar with the business and have the ability to accurately assess applications and approve loans quickly (sometimes on the same day).
Over the past few decades, such decision making has become centralised and in some cases automated and that link between the personal relationship and the decision making has disappeared. Potential borrowers will often meet a relationship manager to discuss the loan whose mission is to lend, and if they take your case forward they will almost certainly be supporting the application internally.
But ultimately the decision is made by a central credit department, and applications can sometimes fall down because they don’t tick a box, rather than necessarily being a bad prospect.
One reason for rejection can be that the bank is not lending to your sector, so for example, some banks will automatically reject retail businesses. Others may have lending quotas for each sector and success can depend on how many other successful applications they have had in your sector.
A move towards more regional banks which can make local, speedy lending decisions would be a good thing. I’d also like to see mentors appointed to work with businesses on developing and delivering their business plan as a condition of funding to both add value and skills to the business and also help to reduce the perceived risk by the bank – this way they would have real time information and feedback on how things are going, rather than historical data. We are seeing challenger banks emerging which are more nimble and often able to make quicker lending decisions.
For now businesses are faced with a tough (but often fair) borrowing environment. But an understanding of how banks work and what they are looking for makes a huge difference to your chance of success.
Making your application attractive
First off, you need to establish whether a bank loan is it the right type of funding for you. For some early stage businesses, equity is often likely to be the better route – particularly for small businesses that don’t have the cashflow to make regular repayments. And if you decide on debt (borrowing) – a bank may not be your only option, there are all sorts of alternatives where you can secure debt against assets, invoices, pensions, and IP.
So if a loan is your chosen route, there are a number of things you can do to make yourself more attractive (and many of these go for other types of funding too).
Firstly, sound out the bank and find out if they are lending to your sector. If this sounds daunting, get a professional to do it. At FundingStore, we enable people to quickly search through potential lending options and we have a team of experienced professionals who will talk to wide range of banks and lenders anonymously to help identify likely lenders.
Once you’ve found a potential lender (or narrowed it down to a shortlist), the key to securing funding is to make your business proposal attractive to that lender. This means, above all, understanding their lending criteria.
Assuming you tick the ‘potential borrower’ boxes, banks will then be concerned about whether your business will generate the cashflow to pay back the loan, (or at least the interest element) and what security you can offer against the loan.
Most lenders will look for security to provide them with the ability to recover their funds if you default on the loan repayments. This may be in the form of a charge over assets in your company. Always take professional device in this area.
And they will also want to see a decent business plan which shows how you will use the funds in your business (and also how you will repay the lender!).
So present a clear plan which outlines your business strategy. Show that you have considered the size of the market, and highlight a successful track record of capturing a share so far, along with financial forecasts. Indicate how you will use the funding to grow the market or your share of it.
Provide information about your management team. This will be a key consideration for any lender. You need to show you have a team that can develop the product, market and sell it, and just as importantly, manage the finances. If you have gaps in your team, try and fill them get one in place before you apply.
So, don’t write off banks as an option. Ask yourself if you’re a good prospect and if your business can benefit from debt funding. Find a lender which is right for you, and put in a compelling application. And, as always, seek professional advice.
