Turning a bank’s ‘no’ into a ‘yes’

Persuading a bank to part with its money is easier said than done. Here though, we look at how you can improve your chances and turn a ‘no’ into a ‘yes’

The smaller your company, the harder it seems to be to get your bank to take you seriously. Early stage companies often tell us they are frozen out by managers who can’t be bothered with sums that seem piffling to them but make the difference between survival and failure for a developing business.

And don’t even mention R&D, says Mike Bradley, founder of InputDynamics Ltd (IDL), which has developed seriously sexy technology that turns an ordinary mobile phone into a touch-screen smartphone and is being assessed by the tier one handset manufacturers.

IDL has been given an R&D government grant channelled through the East of England Development Agency (EEDA) and more recently a Pathfinder Investment from Cambridge Enterprise. It wanted £10,000 to tide it over through a temporary cashflow deficit. This was a zero-risk loan, says Bradley: “You collect your receipts, have them signed off by your accountant, submit the bills, they approve them and the money is released. The process is staged, hence the deficit.”

The company faced a brick wall: the bank wouldn’t advance to a business built on R&D, despite the fact that payment was guaranteed and this is a scalable company with global potential. As for constructive advice, it was suggested Bradley and his team use their credit cards! The bank would give no explanation for its decision, leaving Bradley and his co-founders incredulous and cynical. “It is really difficult to borrow money if you have a small company. They just don’t understand business!”  Bradley adds.

The rules of the game

Robert Copping, founder of business planning consultancy Sightpath and author of The 5 Essentials to Secure a Loan for your Business, agrees with Bradley that banks don’t give much feedback as to why they won’t lend to a business, and are very reluctant to lend at all in certain exposed sectors such as property, catering, gaming and travel. Of course no bank will lend without security, he says. But there are strategies you can adopt to swing the negotiation your way. “If you are in one of the sectors they will lend to, it is a simple question of establishing that you are likely to be around for the term of the loan and to generate enough profit to service the debt,” says Copping.

To make that case you need to be outstandingly well prepared. Peter Ibbetson, small business chairman for Royal Bank of Scotland and NatWest, says the most important pieces of financial information are cashflow, profit forecasts and debtors. “That tells me the expected sales, the profit from those sales, how quickly you expect the money to come in and your other outgoing and funding costs within that cashflow.”

The information you provide is then ‘sensitised’. The bank expects you to be optimistic about sales volumes, profit margins and how fast you can get people to pay up, so those forecasts will be challenged. And you may have forgotten that the base rate is not going to stay at 0.5% forever.  “In this way we end up with something that we regard as realistic. If that reality still supports your ability to service the loan or overdraft, we are there to lend,” says Ibbetson.

Lending has fallen by around 10% on last year because fewer companies are seeking finance, according to the banks, and Ibbetson says that RBS group has seen a 25% fall in both the number and average value of applications. “The decline in funding is demand driven: we still sanction 17 out of 20 applications, exactly the same rate as in an up-cycle,”  he says.

Turning a ‘no’ into a ‘yes’

If the answer is negative, there are other channels to investigate. If you accept a smaller loan, for example, you don’t have to wait for the full term to elapse before applying for another, advises Sightpath’s Copping. 

“People think that if they take out a five-year business loan that is their only funding over that period. But you can run a loan for six months, get another six months’ trading figures under your belt and then say ‘we have met the conditions and exceeded the trading expectations, now we want to borrow more’.”

When they can’t or won’t lend, banks often suggest asset finance or invoice finance – factoring or invoice discounting. “We may point the business towards asset finance – that would keep an asset off the balance sheet – or we may take them towards invoice finance,” says Ibbetson. “If cashflow problems arise because debtors are delaying, typically with an overdraft you might cover 40% or 45% of your outstanding debtors. With invoice financing you can get that number to 85%.”

However, not everyone is willing to lose control of their equipment or their invoices. The founder of Tyrrells Crisps and Chase Distilleries, William Chase, thinks he could have grown much faster if he had been able to borrow as he wanted.

“I was making 30% net profit in the first couple of years but the business was growing so fast it absorbed all our cash. I didn’t have any properties to borrow against, only the business. All the banks would offer me was factoring, and I am strongly opposed to that because I think it takes one of your nine lives away. Once you have signed that agreement you have given them everything,”  says Chase.

The human touch

Both Mike Bradley and Chase think the banks need to allow managers more discretion and treat small businesses as individuals.  “A personal relationship is difficult if the individual hasn’t the authority to influence a decision,” says Bradley. And Chase agrees: “Small businesses and people with ideas who want to fund a start-up are lucky to get to talk to a bank manager, and if they do they are quite junior and don’t have the authority to negotiate or interpret the rules.”

Frustrated they may be, but neither thinks you can bypass the banks. “If you have a really good business plan and can back it up then you stand a chance,” says Chase. “You can’t blame the banks for turning down proposals that aren’t backed by good financial information. But that said, it is a pity they can’t look at people’s characters and motivation instead of just ticking boxes.”

With the advantage of Australian ownership and headquarters in Glasgow, Clydesdale Bank has perhaps been able to retain more traditional Scottish client relations than its competitors. Bankers are born process-driven according to Robert Copping, but Clydesdale’s regional director Scott McKerracher maintains that relationships are key.  “If you want to get a positive result build a good relationship with your bank,” he says. “We have a traditional relationship-based banking approach. The first thing we try to do is understand where the individual wants to go and where they want to take the business.”

McKerracher doesn’t think his bank’s prudence is compromised by its desire to see its clients succeed, either. “We like to encourage businesses to grow in a sustainable fashion,” he says. “We have doubled the size of our business development team, and peopled it with really experienced bankers with industry experience as well as those analytical skills.”

Most entrepreneurs accept that the banks need to lend with caution, but most would like to see a dash of imagination added to the process too. Peter Job, CEO of the highly innovative and fast growing network visualisation company Intergence, believes that all good business is about co-operating with people – and getting a bank loan or overdraft is no different. “We have a good relationship with our bank manager and he will tell us what he can and can’t do. Then we have to tailor our own strategy to that reality, bearing in mind he has his own constraints to work within.”

All businesses experience unforeseen events, or a quiet period over the summer, says Job, but the worst thing you can do is to keep your bank manager in the dark until the crisis is upon you.  “They should be almost an integral part of your management team. You need to keep them informed of what you are doing. The first question they will ask will be  ‘can I trust these people?’ They don’t like the feeling that you might be hiding something.”

During the down-cycle, businesses are de-gearing and putting off investment in people, equipment and new product development. They are paying back their debt rather than increasing it, so demand for bank funding has fallen. That should mean there is more money available for those companies that do need it, but the banks are looking for extraordinary levels of security before they will lend.

The smart entrepreneur will prepare a watertight case, then present it to the bank with unprecedented levels of charm, subtlety and persistence.                                     

Working with the banks

Scotland’s leading supplier of body fittings to the commercial vehicle sector John Adams Coach Supplies received financial support and a range of banking facilities from Clydesdale Bank as part of its Investing for Growth strategy, an initiative which helps to ease a company’s cashflow.

The commercial vehicle sector was hit hard by the recession, according to Paul Adams, managing director at John Adams Coach Supplies. “The last couple of years have been very challenging,” he says. “We supply our products to anyone who builds commercial vehicles and, during the worst period of the economic downturn, sales were down as much as 40% at times.”

The team at Clydesdale Financial Solutions Centre (FSC) in Glasgow has provided £2.8m of working capital, lending facilities and ancillary banking services to the firm, which was founded in 1946 and is now in its third generation of family ownership. “We moved to Clydesdale Bank following a long association with our previous bank which we felt had run its course,” says Adams. “We’ve been very impressed both by the strong working relationship the team at Clydesdale has developed with us and with what the bank was able to offer us in terms of facilities. Their support will be invaluable as we drive the business forward.”

There are definite signs of an upturn, he adds. “We anticipate the year ahead will be one of steady growth and we’re projecting increased turnover of around £8.5m for 2011.”

How to turn a NO INTO YES
  1. Present a rigorous business plan, focused on current performance, and be ready to defend all your forecasts
  2. If one bank says no, go to others, but try to find out why you’re being turned down and change the business, the metrics and your attitude
  3. Build trust with the bank; make sure you deliver on any promises you make and they will work with you to help you grow your business
  4. Rather than see bankers as an adversary, take them into your confidence; in most cases you will find they will work better with you
  5. Insist the bank tells you why it turned you down: the ones that are part-owned by the government are now obliged to do this
  6. Don’t ask for too much. You may have to think about going for staged loans: it could lead to a yes instead of a straight no.



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