New Bank of England figures show net lending has fallen by the highest amount since December – despite a more positive mood amongst SME’s and things picking up. A Bibby’s survey also shows that one in five businesses have been declined bank lending in the last 6 months. This raises concerns about how SME’s will be able to cashflow new orders where the terms of trade are not favourable.
Many businesses are delighted to get that new order, particularly from a blue-chip name, after probably months of negotiation and hard work. They take the order to the bank and perhaps understandably assume that the bank will be impressed and be keen to provide the funding gap created. Often they are aghast when the bank decline to help. What is happening here?
The issue is that such an order might create a new situation for the business and also the banker. The order means the business taking a risk. Although the ultimate client might be undoubted there are a myriad of reasons why problems could occur (missed deadlines, quality not met, client turning out not to be such a good payer, reduced margins etc). To the SME taking such risks is what they are about (otherwise they wouldn’t be in business). To the banker this is a time to carefully appraise the chances of something going wrong – and perhaps err on the side of caution! They do see many businesses that have worked hard to survive tough times and are now doing OK and perhaps without borrowing. Often a new signficant order could well create risks where they would say ‘if it ain’t broke, don’t fix it’. Plus, don’t forget a business that is not borrowing might well be dealing with a relatively inexperienced bank manager.
Another key issue is that bankers tend not to be greatly skilled/motivated to explain their ‘Decline’ decisions in a way that the business will understand and accept. I speak to clients who feel completely in the dark as to why the bank have ‘said no’.
For the SME this is a time to approach the negotiation with the bank very professionally. They need to be able to stand back and try to look at the situation from the bankers viewpoint. What could go wrong? Have they recognised the risks properly, How have they mitigated them? What would happen if the worst happened? What is the true funding need if growth continues? A banker faced with a business that has considered all these issues and has their answers prepared is going to more willing to be helpful