Figures released by the Bank of England confirm banks are lending money and increasing the amounts to Small to Medium Enterprises (SME’s). In quarter 2, the main banks lent some £53 billion to UK businesses of which £20.5 billion was to SMEs, a 22% increase on the first quarter.
To see some of the comments in the media you could be forgiven in believing banks had closed their doors and only involved themselves in complex banking earning hundreds of thousands of pounds for themselves. The figures released by the Bank of England dispel this myth. The banks are in business to lend and that is what they are doing. They are being more careful – that’s what we wanted them to be after some of the almost reckless lending that went on in the past.
As a result, it is now critically important that if you want to start a business or apply for further funding, a carefully prepared business plan with forecasts is presented to the bank. Whilst this may put off many would-be entrepreneurs, it should not as business planning is the key to financial success. And do not be put off applying for loans if you do not have the skills to prepare a business plan.
There is plenty of help available from high street chartered accountants that can put together a business plan for a relatively modest amount. It may appear to be “dead money” but without it the chances of obtaining appropriate funding will be significantly reduced.
And while I am at it we need to explode another banking myth once and for all – invoice discounting or factoring is not the “lending of last resort”. Too many advisors are living in the past, critical of this modern, efficient way of funding. A high proportion of new businesses use this form of finance, which grows with the business, as a major part of their start-up funding.
Banks are in business to lend money, that’s what they want to do, that’s what they need to do.
They are not, however, soft options or charities and if you want to borrow money you have to prove to the bank it is to be well spent and that in due course it can be repaid. In truth that information is actually more important to the borrower than it is to the bank. So give the banks a chance and don’t let’s criticise them just because they are being careful how they lend money. As we are major shareholders in two of the big banks surely that’s how we want them to be.
Having said the critics are getting it wrong in criticising lending to SMEs, where they need to focus is on the banks continuing to support the “walking dead” or “zombie” companies. The banks know what I am talking about – the highly-geared low-margin businesses that are surviving on interest-only repayment loans and stand no chance of trading out of their financial difficulties. The banks need to have the confidence to deal with these businesses so that better businesses can pick up their trade and be more successful.
Yes it’s the “law of the jungle” but history denotes that’s how we grow out of recessions. Leaving the “walking dead” alone only keeps growth down and leaves us in a recessionary period for far too long.The concerns of the banks in dealing with these businesses and increasing their provisions for bad debts need to be put to one side and they should have the confidence to sort them out so the wider economy can improve.
If we stop “bashing” the banks for a while maybe their confidence will return and allow them to deal with these companies and then we will all benefit from an improving economy.
John Kelly is Begbies Traynor Group Regional Managing Partner for the Midlands and South West.
Find out more about the new realities in banking at the ICAEW West Midlands’ seminar at Deloitte’s in Birmingham on October 11.