In the third and final part of our extensive Q&A with small business chairman for Royal Bank of Scotland and NatWest Peter Ibbetson, he responds to a range of other queries about invoice finance, switching banks, overdrafts and introducing growth funds.
In the first part, the man who reports directly to chief executive Stephen Hester answered your questions on the bank’s track record with small and growing businesses
And in part two, he answers your questions on securing bank loans.
Banks seem banks have pulled away from invoice finance facilities. Is that so and why?
No, quite the reverse. Invoice finance facilities are extremely important and I think will become more important as we exit the recession. If you look back 10-15 years at invoice financing (or factoring as we used to call it) it was often seen as the last place you go. In fact invoice finance is now seen as a very efficient way of putting your debtors into your cashflow straight away. So typically, as you issue your invoice, the lender will provide up to 85% of that invoice today in cash and then will collect that debtor as and when it falls due. Why is it more important today? In a recession, big companies will take longer to pay and many businesses have suffered from delayed debtor payments over the last 18 months. One of the reasons the Enterprise Finance Guarantee was particularly useful was that it enabled businesses to get cashflow that was tied up in debtors. Invoice finance can also help with credit references, so can do the credit reference work on the customer you’re dealing with. It also does the collection process when it’s due, rather than you trying to get that money in. Experience tells us an invoice finance company is much more efficient at collecting debt when it’s due in. Also what you can provide is debtor protection. For a fairly small premium you can actually protect yourself against your customers going into insolvency. The volumes we see for invoice finance are growing and I would see them growing even more so.
What are the new risks associated with changing banks? Is there really any strength any more in having a track record with a bank?
Yes there is. Track record, whether with one bank or a range of banks, is very important. When you’re trying to get credit from customers you’re dealing with, having a track record is very important. In moving banks we have a very competitive banking marketplace. We don’t like losing customers and nor do the other banks, but we are actively out there trying to win business from other banks when the relationship with the bank is not as good as it should be.
A potential new client said he requested an overdraft facility from NatWest, but they wanted the directors to be jointly and sever ably liable. As two of the three directors have young families, they had hoped the personal guarantee of the CEO would have been enough. Could they not be more flexible?
Robert Copping, Sightpath
I don’t know the specific case, so it’s pretty hard to make a call on it. For decades it’s been absolutely the norm that when directors come to us to borrow in the company name we ask for a directors’ guarantee. It’s quite normal that the wording is jointly and several guarantees. It doesn’t surprise me that they’ve been asked for those. It doesn’t mean to say that because the guarantees are in place that every asset the director’s have got is on the line. Experience tells us that directors’ guarantees are very useful because not only do they make the directors really focus on making the business successful, but in the event that the business does fail, the directors are much more efficient than an insolvency practitioner in selling the assets of the company. It’s actually really worthwhile from the directors, the business and the bank’s perspective to have the directors involved. The most important thing in this specific case would be, were those directors also asked for charges over their houses to collateralise those guarantees? And from what you’ve said to me they probably weren’t. In that case, it’s probably quite reasonable that banks ask for directors’ guarantees, but then they will take a view on what the actual value is in monetary terms.
Would you be prepared to initiate a RBS-NatWest MBA Scholarship Fund for the UK’s business top guns? If so then I’d be happy to pilot the fund and develop the scheme with RBS-NatWest as part of my three-year Warwick MBA by distance learning which starts Jan 2011. I would propose 52 awards of £10,000 per annum, or one award per week. A half million commitment which would help underpin innovation and long-term wealth creation in the UK.
Neil Tierney, Onzo
We look at these things day in, day out, and we sponsor quite a number of awards and work with quite a few of the business organisations in supporting businesses like that. But, if there’s a clever idea, by all means throw it at me and we’ll have a look at it.
Did it sound like a clever idea?
Let’s have a look at it. I’m more than happy to look at any scheme like that. Whether £500,000 is the right number is another issue, but we work with quite a lot of business organisations and will happily look at those programmes, as do the other banks.
Can we expect RBS to create a fund to help bankroll cutting-edge sustainability start-ups in the UK? If so when?
From Twitter via @gb_mag
There is an equity gap at the lower end of the SME spectrum. That equity gap falls into three areas – fast-growth high-tech bioscience companies that are actually seen to be fast-growth do have access to a reasonable depth of equity funds. A lot of the universities have these funds. There are funds available for equity in the £10-20m plus range, so for much more established businesses. But there is a gap in the middle, which could address non-stellar businesses. So, classically successful family businesses; those that don’t just need cashflow but need equity coming in. That’s not easily accessed. There is a gap in distressed businesses needing equity rather than cashflow. That’s not easily accessed at the moment. I think there’s a gap as well where you’ve got young entrepreneurs coming through; 250,000 out of university and they haven’t got jobs and want to set up their own business, but have no track record and no security. They would be perceived as an equity risk at the moment. There’s very little that actually helps those individuals get started. So, where will those funds come from? There’s very active dialogue between the government and the banks. One of the things we’ve got, being government owned, is good access. So we have good conversations and are doing so at the moment. There was a review done by the last government by Chris Rowlands, who recommended a £1bn equity fund and that is under discussion as to how that might be launched as well. So there are some very active discussions going on about how we can make funds available to young entrepreneurs who fall outside traditional, core bank lending and needs something that has a higher risk attached to it.
Ask a question
Peter Ibbetson and an expert panel will be taking your questions in a live webinar on October 28, 2010 at 2:30pm. If you have questions on how to access finance, go to www.natwest.com/businessknowledgewebinars