The problem with banks... ?

It's bankers' outdated obsession with security that's stopping SMEs borrowing...

A typical owner managed business looking to their business banker for funding will end up being asked for Personal Guarantees to secure any loan... and that's got to stop

The desperate will always sign whatever the bankers want... but the rest are increasingly turning away from bank finance... and who can blame them...

Last month I was with a solid, established company who have a real growth opportunity. The middle aged owners have run the company profitably & completely debt free for over a decade, and for all that time they've been with the same bank... yet they didn't get the modest business loan they wanted... why?


Because after supplying all the historic accounting information (which their bank had already been given), filling in all the forms, doing a we-all-know-its-useless-but-ya-gotta-do-it forecast, and emailing, phoning, meeting their lovely manager... the bank insisted on full Personal Guarantees for the whole loan...

These people have homes, with mortgages paid off, teenage kids etc ... why the hell would they take the business risk so deeply into their personal lives that they could end up homeless at their age & after all their efforts?

Strikes me all the risk was on their side...what real risk were the bank taking when offering a loan that's more than fully secured?

My gripe is... interest rates charged on loans are supposed to reflect risk... the higher the risk, the higher the rate... so let the rate take more of the strain... and drop the obsession with security

...or let's be really radical and offer a company 2 rates... a lower one with Personal Guarantees... a higher one without any...

Security : how it works
This obsession with security & personalising a business' risk is a real problem for the economy as whole (and for a Government that wants you to borrow)

It means banks effectively ignore any drivers of growth within the business (customer base, order book, employee skills, market position), and concentrate far too much on tangible assets to support any lending.

They make that even worse by applying 'risk weighted asset' models ... which normally means ignoring most of your assets, like Stock or W-i-P.

It also means ignoring Debtors (which is why they try to push you to invoice discounting or factoring... they can't lend against your Debtors... but they 'know-a-man-who-can')

So you're typically left with tangible Fixed assets... which usually means Property.

For most Owner Managed Businesses this all means they haven't got enough assets in the business to support the bankers' obsession for security... so it gets Personal with Guarantees required.


Your manager : how he works
Your bank manager has almost no impact on the situation... they just package up the deal proposal to pass on to a remote credit committee...

That 'committee' makes a decision & sets terms based on a few of things, but they will :

1.check your company credit ratings : if you've met me you'll know how important I think ratings are nowadays... banks take these ratings and employ a few twists of their own...

eg typically 'Head Office' will rank your sector (often in a traffic light scheme)... and the rankings are always changing...

... so a builder might find it easy to borrow today because construction is 'green', but next month it might be 'red' as the bank tries to reduce exposure to the sector or have a more balanced loan book... and now the builder won't get the loan

2.check your bank manager's record : after years of successfully not losing the bank's money and only putting to the credit committee deals that they'll accept, a manager will be given an internal score or % that improves as time passes...

I know an 80%er... and a 95%er...  the 95% banker is as close to 'can-do-the-deal-guaranteed'  as you'll get... but just you try getting him to take on a deal that he's happy to put his name & score to and that he'll push up to the Credit Committee...

(as an aside this is why sometimes the process can take so long... your manager may be stalling because he knows your current credit rating & sector rating means you'll get knocked back.. and he doesn't want to see that happen (it hurts you & his own internal score)... so he may spin things out to see if you or your sector rating improve... and of course they hate to say an outright 'no' because then you'll go elsewhere !)


So what's to be done?

I work with some cracking bankers... and they do genuinely want to lend and support the SME sector... and the fact that you guys aren't borrowing is genuinely puzzling them...

So.. assuming that encouraging SMEs to take on more debt is a good thing... how about we :

1. get rid of bankers' anachronistic reliance on Personal Guarantees
2. reduce their obsession with security & their reliance on 'risk weighted asset' models (which struggle to work for younger, service based businesses)
4. let the interest rate alone reflect more of the risk of the loan

And if the interest rate then gets too high... and the Government still wants to interfere with the market to get SMEs borrowing & growing again... they can subsidise the rate & get it down to a better level...

But it's not interest rates that are the problem... or access to finance in the first place (only 9% claim it's a barrier according to the SME Monitor, down from 15% 2 years ago)...

It's the banks, and the terms they demand.