Relationships between SME’s and their bankers can be very effective and both parties benefit. But they can go wrong, and often that is down to poor communication by either party. It can also however be down to changes in how banks are having (or choosing) to operate – which are not always understood or accepted by their SME customers – and sometimes they are due to changes forced upon the banks.
A number of factors are coming together which could impact on this relationship further in 2021, and not in a good way:
Reductions in Relationship Managers (RM’s) – many organisations work an ‘Account Manager’ model: a capable individual who is the ‘gateway’ for a customer to access and understand how the company works and who also ‘problem solves’ for them. They should get to know the client’s needs and match what the company can provide, so as to ensure the relationship is more profitable. RM’s are an expensive resource for a bank when they are dealing with customers below the ‘Corporate’ level. Many would say that they are more essential in dealing with smaller businesses, who have less time and expertise in navigating the banking world and who need more ‘understanding’. However, decisions in large banks get made on cost/benefit and in the last quarter of 2020 we saw an increase in redundancies of experienced front line bankers (and also their support staff). Banks have perhaps seen that they can still operate with staff working remotely and, of course, many RM’s work out of branches and the banks have been overt about their intentions to close more. All these leaves SME’s dealing either with Call Centres or less experienced staff backed by centralised decision making.
Bounce Back Loans and CBIL’s – these schemes have saved many businesses but after initially overwhelming the banks there will be a legacy to this. The High Street banks are already deploying resource to audit what has been lent and what the funds have been used for. There will be accusations (justifiable or not) of ‘mis-selling’ and this will inevitably lead to a tightening of their credit stance We have already seen this with several of the banks being in the incredulous position of refusing to open new business accounts because of the prevalance of fraud. Many of the new lenders have completely dedicated their lending activities to CBIL’s and pulled back their conventional lending. SME’s looking for non-CBIL’s loans already have fewer options.
Cash Flow problems get worse when things get better – this seems ironic but past recessions have proved this. When things get tough the strategy is to batten down the hatches and cut costs and go into survival mode. CBIL’s and BBL’s have enabled many to ‘stay in the game’. The real tension between lenders and SME’s come from when things pick up. Excited by a new order which will restore the fortunes of the business, the SME’s will find lenders are understandably cautious about the cashflow implications. The SME will have a depleted balance sheet, perhaps not as well-resourced to deliver under pressure. The end buyer may have a poor covenant and credit rating. ‘Invoice Discounting’ and ‘Purchase Order’ financing will play more of a role, but bankers will inevitably find themselves under criticism for not being supportive just when they are really needed.
Director’s Personal Guarantees – the directive to banks not to take PG’s (for CBIL’s up to £250k) risks making these seem like a thing of the past. They aren’t, and for new lending they are bound to become a requirement again. Directors will be more nervous about committing their personal assets when their companies are not so strong as before. Pressure mounts (or certainly should) for more registration of PG’s. A Director with house equity can give PG’s to different lenders that collectively outweigh their ability to pay. Procedures for taking PG’s have become more ‘lax’ and there are bound to also be reputational issues in this area also for lenders. There will be tension.
HMRC as preferred creditors – this is a high profile subject in the Insolvency Practitioner world but is not getting as much coverage as it should for SME’s. The reality is that lenders whose security model involves ‘Floating Charges’ (typically a ‘Mortgage Debenture’) will find HMRC ‘at the front of the queue’ if a company fails. Lenders have yet to communicate the implications of this on their products and criteria, but behind the scenes you can be sure it is causing debate.
SME’s having less time and resource – announcements on Linked-In alone are evidence of the number of experienced Finance people who have been ‘let go’ from SME’s as they cut costs. They will be needed again, but you can be sure there will be a ‘lag effect’ as companies decide to manage without what is a relatively expensive resource until pressure builds to re-employ. This means CEO’s or less experienced finance staff will be dealing with banks and will have their first experiences of the challenges in that relationship.
There are messages for lenders and also SME’s in this:
- Communication from lenders is absolutely key – so often I’m involved in a stressful situation (often at the instigation of the banks themselves) only to find that if the bank manager had only explained things better (which is actually ‘a skill’) the problem wouldn’t have arisen in the first place
- High Street banks to address the ‘perception’ that they see small businesses as ‘second class’ – sadly this still exists although the banks make massive investment into start-up programmes and support and do realise the economic importance of the sector and the income they generate. But smaller businesses just feel they are not as important as the Corporates (and the reduction is RM’s is key to this).
- SME’s must realise the importance of ‘Lender Relations’. A Plc or a company with Angel Investors know they have to commit to communication and managing their ‘stake-holders’. An SME who is reliant on the continuing support of their bank (and many now are) can no longer be reactive in this relationship – ‘Managing your Bank Manager’ is the message for 2021