THE BUSINESS ARTICLE - Credit – Still Crunched?

Author(s)
David Wisbey

There have been many complaints in the business community that, more than a year after the “credit crunch” began, when companies first found it difficult to borrow new money, the problem is still with us, and that banks are still reluctant to lend, particularly to small and medium sized entities (“SMEs”). At Birkett Long, we often talk to our contacts in the banking community in Essex. Here we report the banks’ views on the subject.

The true position is not easy to establish. Some statistics appear to show that it is the appetite for companies to borrow money that has diminished, and it is not just a question of the availability of funds. Lord Sugar, the Government’s entrepreneurs’ “Tsar”, claimed controversially last autumn that the fault lay with the businesses, not the banks, and that the great majority of SMEs that wanted more cash deserved to “go bust” rather than be backed.

On the other hand, it is impossible to deny that new lending to SMEs has declined and that business’s perception is that credit remains hard to get. A British Chambers of Commerce survey in the autumn of 2009 reported that 33% of companies thought that accessing finance had been more difficult over the previous three months. This compared with the same question asked in June 2009, when 20% of businesses believed access to finance had worsened.

What are the views of the banks in Essex? The overwhelming view is that, for the right proposal, properly researched and presented, funding is available.

There is no doubt, however, that attitudes have changed, and that the amount of detailed information required to obtain credit approval has increased. One of our banking contacts gave us the example of a customer in the motor trade, who had borrowed £100,000 two years ago and had successfully repaid the money. He had identified a good business opportunity and now wanted to borrow the same sum again, over the same period. The bank’s view was that it had the money available to lend to him, but the lessons of the “credit crunch” meant that the tests that would now be applied to the ability of the customer to repay the money had changed. He needed to be more explicit as to how the project would progress and how the money would be repaid. A good repayment track record from a prior loan was simply not enough on its own.

Another local banker pointed out that too many businesses are still unable to supply detailed management information to their bank. It is no longer sufficient to know the turnover of a business, it is necessary to understand and to be able to illustrate the key performance indicators, such as stock levels, work in progress and debtors. Better still, a forward looking business plan, with projections of earnings and cash flow, will make life easier for the credit approval process. There are plenty of accountants locally who are able to provide help in preparing this kind of information, and there is really no excuse for it to be lacking nowadays.

Even a temporary drop in performance is not a bar to new borrowing for a business. A contact told us that a well established business, with a good track record and good prospects, will be considered favourably for funding, where recent trading problems can be explained and the right steps have been taken to address performance issues.

We are always happy to talk to clients and contacts to pass on our knowledge about local banks. If you would like to hear more, please contact David Wisbey on 01245 453817 or david.wisbey@birkettlong.co.uk

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BLong newsletter - February 2010

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