A new world of borrowing

Finance
Written by Paul Williams
Friday, 15 May 2009
The days of all your banking eggs in one basket, which is the way most businesses operate, needs to end. A recently reported exercise by a National finance broker put the profile of a “perfect” small business borrower customer to all the major banks and none of them could see the opportunity. Related Articles: Barclays maintains commitment to SMEs RBS, Lloyds Banking: How to deal with business banking dominance SMEs still accessing funds SME financial backing announced Competitors to Lloyds Banking and RBS will find it tough Related Links: Barclays Business Business Link London Business Northwest Business Yorkshire Cass Business School, London This matches many businesses experience of the current market. Despite this the Government and Banks continue to extol the success of the Enterprise Finance Guarantee scheme (EFG) and the large amounts of loans being generated by it. What is really going on? It is undoubtedly true that businesses are finding that this year’s overdraft review is generally an expensive experience. Fees that were subject to standard rates that were always negotiable (downwards) are now subject to new “policy” that says they are “minimum” rates. Interest margins which have always been more variable are now being set at much higher figures because they are “right” for your business. Bank Managers cannot apparently negotiate these rates due to “higher authorities”, “policy”, or “computer says so and I cannot overrule it”. The message is that new and renewed borrowing facilities must be on a take it or leave it basis and are not open to negotiation. Back in November, the bank CEOs were falling over each other to issue reassuring words and guarantees (from RBS Group and Lloyds Group) that they would not increase pricing on small business facilities in 2009 from 2007/8 prices. Stephen Green of HSBC even claimed the moral high ground by telling the CBI conference on 24/11/08: ‘The market system, the capitalist system, is at its heart about trust, and nowhere is this more true than in banking.' ‘If we are to restore trust and confidence in the financial markets we must address what is at its root a moral question. Trust and confidence cannot be restored by fiat. Actually, the process of renewal has to begin with a recognition of the moral dimension to what has happened. ‘It is as if we have grown increasingly accepting of the idea that the value of what we do is fully delineated by the market, by regulatory compliance, and the law of contract. If the market will bear it, if the law allows it, if regulations permit, then it must be OK. Yet we all know this isn't good enough.' The problem is that none of the above words or guarantees were passed down to the front line managers. In fact a contrary message, or should we say dictat, appears to have been communicated: “All pricing must be revised in line with centrally set criteria irrespective of current pricing.” To achieve this banks have had to put continued support to customers on the line and in the current market this tactic is working as businesses are aware for the press that the availability of credit is sparse. However it is further undermining what little bank goodwill is left. Additionally, banks’ knowledge of the EFG scheme is minimal and borrowers often know the rules and criteria and certainly the intent better than the lenders! The need for effective negotiation is imperative. The days of all your banking eggs in one basket, which is the way most businesses operate, needs to end. All businesses, however small they are, should now be exploring multi bank operations. It is the only way that they can reliably ensure that they are not held to ransom on borrowings and that other banking services are competitively priced against the background of their borrowing needs and perceived vulnerability in this area. Share this: digg del.ico.us Newsvine Reddit Furl technorati Facebook Comments (2) Subscribe to this comment's feed A very high risk strategy Posted by Mike, 17 May 2009 If you follow this advice you are likely to get no credit at all! Banks rely heavily on credit and behavioural scoring systems which base your credit worthiness on what they see passing through your account. So if you multi bank you will appear as a poor risk to each bank. Do your homework and pick a bank and branch that has a consistent lending criteria and is in the market for the long term. Look at all the funding options Posted by Mike Weaver, 03 July 2009 It is getting tougher for small businesses to obtain funding, as in many cases banks are not only tightening credit policies but also reducing or withdrawing established lines of credit. Small businesses will have to step out of their comfort zone and look at alternative funding options if they are to survive. Entrepreneurs need to be aware that they can mix and match the borrowing solutions that best suit their needs, both in terms of their financial requirements and length of investment. The first £100,000 usually comes from supportive friends and family members, whilst at the other end of the spectrum the venture capital houses are an option for those businesses seeking funds in excess of £5 million. The government’s Enterprise Finance Guarantee (EFG) scheme has been introduced to help businesses that are struggling to find investment, but only a few banking business managers are aware of the terms or availability. For companies requiring between £100,000 and £3 million, angel investment - where an individual provides capital in return for a stake in the company - is rapidly proving to be the most viable option to plug the funding gap. Most importantly, angel investment extends beyond financial commitment to include invaluable advice and experience from the investor in a start-up or early stage business. Looking at all the alternatives and choosing the option best-suited to the individual needs of the business will put UK entrepreneurs in the best position to survive until the credit begins to flow... Post a comment Name (required) Email (required) (not published) Website Title By posting on this website you are agreeing to abide by our website comment policy and all posts are subject to the approval of the website editor. 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