Accessing an appropriate amount of finance is a key requirement for UK businesses as the economic recovery becomes more firmly established and businesses seek to resume their growth trajectory. But the environment for debt finance has changed. Here, Clive Lewis, head of enterprise at the Institute of Chartered Accountants in England and Wales, advises on how to manage your debt finance facilities.
While access to finance appears to be improving and banks say they are ‘open for business' the costs of bank finance have risen, both in terms of interest rates charged and also arrangement fees. As a result of Basel II, the accord on minimum capital requirements, banks are looking more closely at risk and, consequently, security. Put simply, the more risky the business and the longer the term of the loan, the more capital the lending bank must hold.
From the banks' perspective, they are not more risk averse. But, as a result of the recession, there are more businesses that fall into the higher-risk category, and simply aren't viable.
Many businesses have also noticed that the banks' information requirements have increased, with more client data required more frequently. Banks claim to have learned from past experience. Greater transparency leads to an open and honest relationship. The improved information allows banks to understand the business plan, spot trends earlier and be better placed to help and respond.
Relationships are key
Banks also stress the importance of regular dialogue with them, and keeping the relationship manager informed. Because of the increased level of regular information that banks require, it is difficult to keep bad news from them for long. But it is important to give a balanced picture of prospects at all times.
Your risk profile
Banks use a variety of information to assess the risk associated with business finance facilities. For smaller businesses, there are two key inputs into most lending decisions. The first is behavioural scoring data, which monitors how accounts are run and loans repaid – with unauthorised overdrafts, missed payments and dramatically falling turnover scoring badly. The other is credit reference data which measures late payment of suppliers, court judgments and late postings of accounts at Companies House.
The key is to provide your bank with timely and accurate information to enable it to assess your current position and see clearly what your likely funding requirements will be.
Banks don't like surprise
If you've fallen short of your projections in the past, make sure that you provide them with sufficient information to show that you have a grip on the finances. Make sure you're complying with all your loan covenants.
Take care transferring
Figures suggest that more businesses are switching banks. Who might you turn to if you are considering a switch?
It's always a good idea to talk to your accountant, as they have a good knowledge of the current market and which banks to approach. They can also help with your business plan. Switching is more of a consideration if you have a new need for finance or have been rejected by your current bank – although you should always discuss rejection at a higher level in your current bank. Some banks have a confidential hotline that you can use to make an initial approach for alternative sources of finance.
If you are considering a new source of finance, it helps to be open to suggestions of alternative types. Businesses often opt for overdrafts because of their flexibility, but banks now view overdrafts less favourably.
An alternative such as invoice finance may give an increased facility.
About the author
Clive Lewis is Head of Enterprise at the Institute of Chartered Accountants in England and Wales (ICAEW).
Advice on how to get the best from your bank