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Getting Small Business to Borrow

  • Blog
  • 11 August 2016

Written by Ben Baruch, Policy Advisor (Finance, Tax & Economy) for FSB. 

With last week’s news that the Bank of England has cut interest rates by a quarter of a percent and is continuing to pump money into the economy, the ability for businesses to borrow should be easy and affordable.

As ever, the story is a bit more complicated than that. With current political and economic uncertainty aside, FSB knows that a lot more smaller businesses want to borrow funds, but don’t for a whole host of reasons.

Getting Small Business to Borrow

Understandably, many find the ability to compare the different finance options out there difficult and complex. Others have been put off by a negative experience with their bank and are subsequently less inclined to try again (the Competition and Markets Authority, a powerful independent regulator, has published its recommendations on improving competition in the banking sector which you can read here).

At FSB we spend a lot of time engaging with policymakers and banks in order to improve the ways in which smaller businesses are able to access credit. But whilst policy developments roll on, we have set out some of the key things banks in particular are looking for when a smaller business applies for a loan to help if any of you out there are at this point in your business.

In the past there appeared to be an element of alchemy in the ways in which banks decided who to lend money to and who to reject. To some extent this is what led to a number of high profile finance providers over-lending to certain sectors in the run up to the financial crisis - and with disastrous results.   

Increasingly, the focus of bank lending has changed from security (what assets you can use to effectively guarantee your borrowing application) to the serviceability of lending (your ability to pay it back). A consequence of this is that banks now undertake a far more rigorous process around due diligence – assessing the risks which firms are taking on – before making a decision on whether to approve a borrowing application.

We have detailed below a few short tips on what banks look for when considering lending to businesses:

1. Management Team - Banks look for as much detail as possible on the leadership of your business as well as their relevant experience. This makes up a significant portion of the bank’s risk assessment of the borrowing application.

2. Liquidity/cash-flow – Quite simply, banks want to know how much cash you are planning to set aside for future investment and development in your business. You might have a very balanced and healthy cash-flow but this might only be with one client. What if you lose this client? What if your clients continually pay you late? We would encourage you to address these issues directly in your business plan.

3. Structural risk – Unsurprisingly, banks will be very interested in whether your business has any existing overdraft facilities and/or debts. These aren’t necessarily problems - but you need to be able to explain how such risks are being managed.

4. Credit score – It is important to realise that your credit score is being calculated even if you’ve never made a borrowing application before. Overdrafts, outstanding debts, irregular cash-flow all contribute to this score – information which a bank will consider indiscriminately.

5. Company structure doesn’t matter - Partnership, limited company, sole trader etc has very little to do with banks’ creditworthiness assessment. Businesses often assume that incorporation is an important route towards coming across as a more credible borrower. This is not the case.

6. Is a loan actually appropriate? - Too often businesses wrongly assume that borrowing money (debt finance) is what they need, when for many, raising finance through the sale of shares in their business (equity finance), often in exchange for real mentoring and leadership, is more appropriate. Certainly one to consider.

FSB works with others such as HM Treasury, the British Business Bank and the banking industry itself and have taken tangible steps to produce free guidance for our members.

Examples of these are:

• Alongside partners, FSB runs the Business Banking Insight (BBI) website, an independent website that has been designed to share the banking experiences of 20,000 micro, small and medium businesses, in order to provide insight into the best banking institutions, products and services across the UK. The website has recently undergone a major revamp following a considerable amount of user-testing, and can be found here.

• We have also worked with the British Business Bank and ICAEW in order to produce a new online version of the Business Finance Guide. The guide includes a range of tools and ideas to help businesses consider their finance options, make decisions and plan how they will finance expansion. The guide is available here

• And don’t forget that FSB membership gives you access to FSB Business Banking which has been provided by the Co-operative Bank over the past ten years. With over 32,000 members currently taking advantage of this service, the Moneyfacts Group five star rated Business Banking account comes with no charges for everyday banking services and no monthly service charge. Providing the UK’s smaller businesses with free banking.*

• FSB members also have access to a dedicated Funding Platform which offers FSB members direct access to hundreds of business funding options with a single application. We help you find the right funding for your business, save you precious time, and lower the overall cost of finance. 

*Free banking relates to standard account transactions and cash deposits up to £2,000 per month. Charges may apply for exceeding any agreed limits and for any special services, for example stopping cheques and CHAPS payments. Refer to the tariff for full details.

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