Birmingham Post Article - April 2010

Richard Horton, partner at accountants Jerroms LLP, suggests the right approach to deal with the banks’ tougher lending policies

As the threat of banking collapse fades into distant memory, it has left at least one troublesome legacy. Shaken by the events of the financial crisis and the losses through bad debts, the UK’s banks are taking a much harder line on security and risk with the result that the poten¬tial borrowing by business is reduced, despite Government ministers urging otherwise.

Some banks are using minor breaches of banking covenants to justify a complete reappraisal of their lending to a customer, while others are using such events to renegotiate higher interest rates and charges.
As a result, many West Midlands businesses are finding it harder to convince banks to maintain banking facilities let alone increase them.

This could be a particular problem as demand and sales revenues begin to grow again, with the result that higher overdrafts are needed to cover cash tied up in higher levels of stocks and debtors.

So how should directors play this? Firstly, it pays to contact more than one bank, as the response from banks and the length of time that they take to reach a decision, varies. Secondly, directors have to be prepared to submit a carefully thought out business plan, focused on market demand, together with a budget based on realistic assumptions and a sensitivity analysis if for example early expectations are not met.

It may even be necessary for owners to invest more equity in the business to give additional comfort to the banks. Finance linked directly to debtors, such as invoice discounting, may also be suggested; customers are often encouraged by banks to move in this direction, because overall risk to the lender can be lower. In any event, it is absolutely critical that the business plan is realistic and is not ‘left behind’ by major changes in market circumstances, some of which have been only too evident as the fallout from the financial crisis and recession has spread around the world.

These days, directors need to be prepared to demonstrate that they have a clear and workable business model combined with sound accounting records and budgeting procedures. If anything, the importance of the banking ‘relationship’ has increased, with a clear emphasis on communication and involvement.

It is essential to stay in touch with your bank – decisions on lending are taking longer, and more information has to be supplied, so the earlier any potential issue is identified, the better.

Specialist advice can make all the difference through help with financial structures, bank introductions and support with a positive presentation of the case for new and sustained financial backing.