May 2013

Bank Lending to SMEs - the Disconnect


BookCheck is in the middle between lenders and their customers - we hear both sides. Our clear and extensive experience is that there is a disconnect between the two. Whilst lending continues, the question is how many deals have been lost because of this. And how much are growth prospects being wasted?

Just 40% of companies with fewer than 250 employees reported using any form of external finance, the lowest level since the start of 2010, a key survey shows.

The bank-funded Business Monitor also revealed that just one in three firms that are planning to apply for a loan or overdraft are confident their bank will agree to the request, down from more than half at the start of 2012, and a record low for the quarterly survey.

EEF, the manufacturers’ group, called for an “immediate review” of small business finance in light of the results, including a focus on increasing competition and making it easier for companies to switch bank.

Lee Hopley, the EEF’s chief economist, said: “Despite investment and investment intentions holding up this year, disengagement with external finance providers is on the rise. We need every pound of investment we can right now to support our SMEs growing into the globally-focused, mid-sized and ultimately large businesses of tomorrow.”

Shiona Davies, director at BDRC Continental, which conduced the research, said the results were down to a combination of a weak economic climate reducing the appetite for credit and an assumption that banks aren’t ‘open for business’.

“There’s a clear message that SMEs are moving away from external finance; fewer are saying they’re renewing facilities or that they’ll apply in the future.”

She added that lack of confidence that banks will approve an application “contrasts with the actual success rates”, which stand at around 70pc.

However, the smallest businesses are finding it harder to secure finance, Ms Davies said. Among first time applicants for bank finance, just 42% were successful.

Alex Jackman, of lobby group the Forum of Private Business, said: “There’s an undeniable and altogether unsurprising drift away from banks as lenders. It’s not a dramatic collapse in trust, more of a slow, inexorable creep away. The banks really must address this issue for the good of the UK economy if they are to avert a real shift in cultural attitudes to finance sourcing.” He added that “Government must read the riot act to the banks to improve their support for businesses that are in the higher risk category, if not with money but by way of more tailored business advice and support”.

The survey – which is used by the Business Department to monitor the treatment of small businesses by banks – also found that only a minority of those declined for a loan or overdraft were offered alternative forms or sources of funding.

Advice provided by banks was typically rated “poor”, and awareness and use of an independent appeals process remains “very limited”.

“Their perception is that they haven’t been signposted elsewhere. They seem disappointed by the whole process,” said Ms Davies. She added that there was also widespread ignorance of Government schemes to boost lending and reduce the cost of loans, such as Funding for Lending.

“If there was a perception that cheaper finance is available, more companies might apply.”

The research described the biggest group of small companies as “happy non-seekers” of finance, since 63% of firms are content not to apply for outside funding.

Ms Hopley added that the Government’s planned ‘business bank’ should be a “commercially focused retail challenger to compete with the incumbents”.

This entry was posted in Business Development, Funding and tagged in SME, Lending by bookchadmin

15 Ways to be more Investible


How do you demonstrate to a complete stranger that they should invest in your business? What makes your business more attractive? How do you reduce the cost of the money (i.e. sell less equity for more money?).

Here are 15 ways you can show that you are better than other competing ideas. This is not an exclusive list, just some of the most important ones.

  1. Excellent Management Team. A good management team can be successful with a poor product but the reverse is not true. So no matter what you are doing, you need a knowledgeable, well-rounded, capable management team.
  2. Have a working prototype. “A picture is worth a thousand words.” So if you can show your product or service rather than just talk about it, you will allow people to quickly evaluate whether you have a solution to a common problem.
  3. Have a prototype you can sell (MVP). The Minimally Viable Product is about having something you can start selling as quickly as possible. Funds from customers always trump those from investors (and are cheaper too).
  4. Good advisors on board. Advisors can help prevent you making mistakes, provide insight into the future, suggest other avenues for your product/service, etc. So a good set of advisors is essential to moving the company forward. One caveat though, if you have ten advisors and none of them are prepared to put money in, it suggests that they think it is too risky (and they are experts in your business).
  5. Legal company set up and operating. Have something someone can put money into – a real company which is registered, has expenses, income, owns the assets, etc.
  6. Sell one to a friend & then stranger. Sell one to a friend and they show that they want it although they could be just being nice to you. Sell them to strangers and you demonstrate you are doing something right.
  7. Put your own money in. If your idea is too risky for you to put your own money in (and you are the expert in your idea) then it is too risky for mine.
  8. Family & friends investment. Family and friends believe in you and your ability to make the company work. They can demonstrate this by providing time and/or money. If your partner went out to work in order to support you in your endeavour, they really believe in you.
  9. Purchase order from a good customer. Having a real order for your product from a well-known brand name demonstrates that you’ve got something that people really want. And it links you to their brand showing that you can really play in this marketplace.
  10. Build barriers to entry. If your idea is good then others will come and copy/innovate so you need to make sure you area ahead of them. Patents and copyright are only part of the picture. Other barriers include market penetration, quality customers, marketing collateral, validated business model, etc.
  11. Good reference customer. Have a well-known customer say how great you are. People will buy on that recommendation.
  12. Documentation showing company owns IP. If someone is putting money into something, they want to be assured that it owns assets. Ensure that all the documentation is there to show that any documents, patents, copyright, etc. is owned (or has been fully transferred) to the company.
  13. Business Plan. A business plan sets out the founder’s reasons for creating the company. It will demonstrate to a stranger that the management team know about the market place, how to produce the product, how to fulfil order, etc. It doesn’t need to be long. The best I’ve seen was just three pages. I never read the one that was 270 pages.
  14. Your pitch. This can't be poor or unprofessional. If you can't sell yourself, you'll find it difficult to sell your business. Get some help and project passion, determination and professionalism. You can't win funding in just the first few minutes of a pitch, but you can certainly lose it. Don't be like the poor performers on Dragon's Den.
  15. Management Information. MI is for a little bit down the road when you have some numbers to report, even if only costs. This area is usually overlooked, it's an afterthought but if the information is prompt and sound you will be streets ahead of the competition in attracting investment.

The more of these you have completed, the cheaper your money will be.

Based upon and reproduced with permission from Brian Dorricott at Meteorical