04/02/2011 - Will my bank lend to me in 2011

and when will bank lending get back to normal?

Bank lending to business fell slightly during 2010 but this must be seen against a back drop of a sluggish economy, and an exceptional increase in bank lending of 17% during 07/08. The banks want to lend in order to earn interest, but, after the excess of the ‘noughties’ they have ‘remembered’ that they also need to see their capital repaid.

Criteria for getting a loan

Bank loan criteria have reverted to those prevailing for the last century (i) a credible management team / business plan and, (ii) loan security. This second point is critical, for small and medium sized businesses banks lend against assets not ideas.

Management team and Business plan

Preparing and presenting a business plan allows a prospective lender to:
(i) get an impression of your skills and experience,
(ii) check you have a sensible business plan, and
(iii) check that the plan can meet interest and loan repayments as they fall due.
It is important, therefore, that funding applications are supported by a business forecast based on realistic assumptions. Banks will understand that your business may have suffered in the recession, in which case it is important to explain what remedial action you took/are taking to get onto a sound footing.
It is also important to demonstrate that you understand your cash cycle – (i) why do you need the money; to fund growth, capital investment, or to address changes in credit terms with suppliers or customers, (ii) how long do you need the money for – weeks, months or years? If you need cash because you are not managing your credit control properly the bank will not be impressed. If you need finance to manage seasonal peaks, and the bank can see from your forecast that borrowing will regularly fall back, they may be happy to provide a base level of lending topped up with a short term additional facility.

Security

The Banks’ will typically lend against:
(i) sensibly priced property,
(ii) your sales invoices to blue chip clients / pools of smaller, creditworthy, customers (either with a formal invoice finance facility or via a charge on assets),
(iii) personal guarantees from directors/shareholders, and
(iv) (at a lower rate) machinery and easily re-sellable stock.

Back to normal?

The ‘asset backed’ lending approach has been the core of bank lending to mid-sized companies over the last century. If you consider:
(i) Commercial property prices have tumbled 40% in recent years,
(ii) Residential property (a key asset for personal guarantees from directors) has dropped by up to 10%,
(iii) A drop in sales during the recession will have lowered customer invoices to borrow against, and
(iv) Some lending in the ‘noughties’ was made against poor quality assets or with no security,
it is little surprise that bank lending is not growing.

The existing borrowing of some companies will exceed their bank’s comfort level now the bank has re-focussed on risk and security. Such borrowers have little prospect of increasing bank facilities and, if allowed to renew facilities, will face high rates of interest. They must hope their past borrowing was invested wisely and will now generate returns.

The experience among our clients is that companies that did not borrow heavily during the ‘noughties’, and which have security to offer, are still able to borrow at sensible rates. The politicians calling for a “return to normal lending” should recognise the ‘noughties’ were the exception and realise the banks, largely, already have.