A good deal has been written recently regarding the attitude to SME lending by the major banks. On the one hand, we have SME owners frustrated by their inability to attract bank funding and on the other, we have the banks advertising and talking up their preparedness to fund SME’s.
Why do we have this disconnect between views?
Clearly, since late 2008 and the commencement of the GFC, banks have been warier of lending. The financial crisis – caused largely by risky lending and banking mismanagement – combined with subsequent higher liquidity and capital requirements have made for a far more risk adverse approach.
However, banks are lending and they are increasingly keen to do so. They are lending less than they used to and looking for tighter security, but the idea that they won’t lend to anyone is simply not true, but you must submit a well-reasoned, structured, quality application.
This myth is not only hurting the banks, but it is hurting SME’s. A problem is that we hear so many negative stories of loan applications dragging out for weeks before amounting to nothing and of bank BDM’s being excited by your application only to have it knocked back by credit that many established businesses with sound bankable propositions are not even applying for funding.
Other SME’s will get a rejection from one bank and assume they fall into the ‘do not lend’ category, and give up – whereas in a more positive climate, they might keep trying. This is slowing business growth and therefore the growth of Australia’s economy.
Why is everyone saying that ‘banks aren’t lending to SME’s’?
To answer the question we need to understand the lending process and rationale applied by the banks. Decisions are no longer made by your local manager who in days gone by would have known you, your business and the state of the local economy in which you operate. Lending decisions are now centralized and subject to stringent internal rules, guidelines and matrix ratings.
It is possible in this centralized and semi-automated system of credit approval to fail simple because you can’t “tick” a given box. So let’s look at some of the actions you can take to improve your chances of success:
In tough times banks require a near perfect credit history with no defaults, judgments or slow payments showing on your credit history. The reporting agencies make mistakes and many suppliers make mistakes so it pays to request a copy of your credit file from the main agencies such as Veda or Dunn & Bradstreet and check that it is accurate.
Recently our Credit Manager brought a large monthly trading account application to me for approval, the applicant trades nationally and is at the upper end of the SME definition. On the credit file were two very small sums of money showing as outstanding for over two years to a major utility company. Had I been a computer I would have rejected the application but as a reasoning person I could accept that such small sums were inconsequential against the annual revenues of the applicant. A quick conversation with the applicants CFO satisfied me and the application was approved.
For a relatively modest annual fee the reporting agencies will provide you with email notification of any changes to your credit file and provide a fully detailed up to file each year.
Most banks from time to time place a limit on the amount of funds they will advance into a certain business sector or avoid some sectors all together. In late 2010 we had a client with a strong business case and sound backing who wanted to acquire assets in the wine industry. At that time none of the major banks would lend to any “non existing” wine industry clients. Don’t be afraid to question the banks BDM as to their attitude to your sector and if the BDM doesn’t know ask them to find out.
Business Plans, Budgets & History:
Being able to table a well-constructed funding application supported by a current business plan, detailed budgets including P&L, Balance Sheet and Cash Flow will help enormously and if you have maintained accurate records of plans and performance over the past three years even better.
The plans and records don’t just show how your business has performed and how it may perform in the future they speak volumes about you as a thinker and manager.
It’s relatively easy for you to know how you stand from a profit and cash position on a monthly basis and you may question the time and investment required in maintaining such detail but believe me it will pay you dividends time and again to do so.
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.
Interest Rate Cover & Security:
The banks will calculate how many times cover your current net profit will give to the total amount of interest payable and they will want that cover to be 2.5 – 3.5 times as a minimum. For additional security the banks will look at your stock and debtors and advance funds against that security, again they will be conservative and depending on the age and condition of stock may lend 60% of cost and up to 80% of debtors. The bank will also look to take a charge over the various assets of your business.
As a general policy you should, wherever possible, avoid giving personal guarantees or security over your family home and always seek professional advice before executing any loan documentation.
Amortization & Exit:
An often over looked point which the banks will be very interested in is how quickly can you repay or amortize the loan and how you plan to do it.
The banks don’t want open ended facilities and they want to know you have more than one option to repay, irrespective of anecdotal reputation banks do not enjoy having to collect on defaults.
Hopefully you will be able to demonstrate an ability to amortize the loan over a reasonable period whilst still leaving sufficient cash flow to cover your interest ratios.
In summary the lending market is constantly changing and hard to keep up with. For this reason it’s often worth engaging one of the companies that specialize in SMS funding as they will have strong relationships with a variety of lenders, understand each banks current requirements and how best to structure and present your application to provide the best prospect of success.