The smaller your company, the harder it seems to be to get your bank to take you seriously. Early stage companies often tell us they are frozen out by managers who can’t be bothered with sums that seem piffling to them but make the difference between survival and failure for a developing business.
And don’t even mention R&D, says Mike Bradley, founder of InputDynamics Ltd (IDL), which has developed seriously sexy technology that turns an ordinary mobile phone into a touch-screen smartphone and is being assessed by the tier one handset manufacturers.
IDL has been given an R&D government grant channelled through the East of England Development Agency (EEDA) and more recently a Pathfinder Investment from Cambridge Enterprise. It wanted £10,000 to tide it over through a temporary cashflow deficit. This was a zero-risk loan, says Bradley: “You collect your receipts, have them signed off by your accountant, submit the bills, they approve them and the money is released. The process is staged, hence the deficit.”
The company faced a brick wall: the bank wouldn’t advance to a business built on R&D, despite the fact that payment was guaranteed and this is a scalable company with global potential. As for constructive advice, it was suggested Bradley and his team use their credit cards! The bank would give no explanation for its decision, leaving Bradley and his co-founders incredulous and cynical. “It is really difficult to borrow money if you have a small company. They just don’t understand business!” Bradley adds.
The rules of the game
Robert Copping, founder of business planning consultancy Sightpath and author of The 5 Essentials to Secure a Loan for your Business, agrees with Bradley that banks don’t give much feedback as to why they won’t lend to a business, and are very reluctant to lend at all in certain exposed sectors such as property, catering, gaming and travel. Of course no bank will lend without security, he says. But there are strategies you can adopt to swing the negotiation your way. “If you are in one of the sectors they will lend to, it is a simple question of establishing that you are likely to be around for the term of the loan and to generate enough profit to service the debt,” says Copping.
To make that case you need to be outstandingly well prepared. Peter Ibbetson, small business chairman for Royal Bank of Scotland and NatWest, says the most important pieces of financial information are cashflow, profit forecasts and debtors. “That tells me the expected sales, the profit from those sales, how quickly you expect the money to come in and your other outgoing and funding costs within that cashflow.”
The information you provide is then ‘sensitised’. The bank expects you to be optimistic about sales volumes, profit margins and how fast you can get people to pay up, so those forecasts will be challenged. And you may have forgotten that the base rate is not going to stay at 0.5% forever. “In this way we end up with something that we regard as realistic. If that reality still supports your ability to service the loan or overdraft, we are there to lend,” says Ibbetson.
Lending has fallen by around 10% on last year because fewer companies are seeking finance, according to the banks, and Ibbetson says that RBS group has seen a 25% fall in both the number and average value of applications. “The decline in funding is demand driven: we still sanction 17 out of 20 applications, exactly the same rate as in an up-cycle,” he says.
Turning a ‘no’ into a ‘yes’
If the answer is negative, there are other channels to investigate. If you accept a smaller loan, for example, you don’t have to wait for the full term to elapse before applying for another, advises Sightpath’s Copping.
“People think that if they take out a five-year business loan that is their only funding over that period. But you can run a loan for six months, get another six months’ trading figures under your belt and then say ‘we have met the conditions and exceeded the trading expectations, now we want to borrow more’.”
When they can’t or won’t lend, banks often suggest asset finance or invoice finance – factoring or invoice discounting. “We may point the business towards asset finance – that would keep an asset off the balance sheet – or we may take them towards invoice finance,” says Ibbetson. “If cashflow problems arise because debtors are delaying, typically with an overdraft you might cover 40% or 45% of your outstanding debtors. With invoice financing you can get that number to 85%.”
However, not everyone is willing to lose control of their equipment or their invoices. The founder of Tyrrells Crisps and Chase Distilleries, William Chase, thinks he could have grown much faster if he had been able to borrow as he wanted.
“I was making 30% net profit in the first couple of years but the business was growing so fast it absorbed all our cash. I didn’t have any properties to borrow against, only the business. All the banks would offer me was factoring, and I am strongly opposed to that because I think it takes one of your nine lives away. Once you have signed that agreement you have given them everything,” says Chase.