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Bank lending: The way I see it

Author: Ian Sykes
19 August 2010

News of the strong profits achieved by high street banks earlier this month was bound to invite comment from representatives of small to medium-sized enterprises (SMEs), as local businesses continue to face a very real challenge in securing much-needed funding, with many feeling that banks could be doing more to make finance easier to access.

Almost two years has now passed since the phrase ‘credit crunch’ was first mentioned, however it is impossible to overlook the fact that the business environment has changed dramatically during this time. Unprecedented events have occurred, what with the near collapse of Northern Rock and with major high street banks requiring billions of pounds of support from the UK taxpayer.

Looking further back at the years leading up to the start of the recession, the traditional view of the ‘Big Four’ banks as the funders of choice for SMEs was being challenged by a number of new players in the market, including banks from overseas and the converted building societies, which had previously concentrated on the personal market. As a consequence of this, the market became increasingly competitive, with more aggressive pricing structures being introduced, and traditional lending criteria being relaxed.

Some would say that it was this trend that was at the very core of the banking crisis, with the banks having to make provisions against potentially irrecoverable borrowing, at unprecedented levels.

Two years on, the tough message for SMEs is that the banks have generally reverted to their long-established lending criteria meaning that pricing structures do properly reflect perceived risks.

The implication for SMEs wishing either to obtain additional bank funding, or to ensure that existing facilities are obtained at the best possible rates, is that the banks will generally need to be assured that the customer will be able to service the loan and be able to repay the borrowing when it becomes due. This usually means submitting a comprehensive business plan and cashflow forecasts that do not merely reflect the best possible scenario, but also explore the implications of failing to meet sales or cash targets, of margins being eroded, or of fixed costs being greater than expected.

So, while the general message from banks today is that they are willing and able to lend to viable businesses, it is generally accepted that bank credit teams will continue to be cautious particularly when reviewing new-to-bank prospective conquests.  

Therefore, it is clear that what is needed is for an appropriate balance to be struck, with funding being made available to viable businesses, on sensible terms, in order to support a successful, long term recovery – at the heart of which is the SME.

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