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May 10, 2012

BANK MANAGEMENT ARTICLE SERIES

Rob Oades
Partner, London Office

Bank Management | Copyright © 2011-2012 Etos Partners


THE BANKING DILEMMA – DO SMES HELP THEMSELVES?

With the level of criticism directed at the banks for their treatment of Small Medium
Enterprises (SMEs) and, in particular, the consensus that they are not doing enough
to provide the critical funding for both essential working capital and investment
projects, a key question is where does the blame actually lay and should it always be
directed at the banks? In particular, do SMEs do all that they can during the bank
decision making process to help themselves?

A good starting point in an effort to understand what appears to be a stand-off


between the SME community and the banking sector is research that indicates that
only 49% of SMEs are currently using external finance to fund their working capital
needs. This suggests that they are being funded either by their own internal profit
generation or by personal funds and/or that there is presently an inherent lack of
demand or desire to seek bank funding which is holding back growth. Further
research indicates that in 2011 only 55% of SMEs that did actually apply for bank
loan funding were successful and perhaps it is this pitifully high “failure rate” that is
driving the lack of demand for bank facilities. Perceptions also provide some clear
indicators of what is driving present trends because 79% of those that were
unsuccessful did not feel that they had been treated fairly and only 1 in 3 thought that
the reasons for decline were adequately communicated to them.

So do we assume, therefore, that the blame clearly rests within the banking sector
and their decision making processes? Consider this however;

1. Nearly 50% of small businesses with between 1 to 10 employees did not


produce regular Management Information (M.I.)

2. 44% of businesses with between 10 and 50 employees did not have a formal
Business Plan

3. Just 19% of SMEs sought external advice before applying for loans and 43%
did not think that they needed advice

So Are SMEs Actually Helping Themselves?

The starting point must always be to have an understanding of the bank credit and
decision making process and to present the proposal in a format that makes the
decision process as easy as possible. There is a need to be always very mindful that
the banker that you present your proposal to will invariably not be the decision maker
and that he/she will need to prepare a detailed report to a central credit department in
order to gain agreement. A need to ensure, therefore, that your Business Plan is both
succinct but also detailed enough to cover all required information. If it does then the
process will be smooth, quicker and will convey the correct positive impression from
the outset.

Be very mindful also that the way in which your proposals are presented to the bank
are just as important as the written content of any Business Plan produced. Ensure

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that you fully understand the content (particularly if not produced internally by
yourselves) and that you have a sufficient grasp of the issues to be able to answer
questions clearly and without hesitation.

Let me now deal with the content of any Business Plan around which your request for
bank funding will be based. The content should include as a minimum:

1. A brief resume of your business to include


- How long has it been in existence
- Who are the owners
- What is the legal entity – Ltd Company/Partnership etc
- From where the business operates ie Leasehold premises
(state Lease terms and rent).

2. A very clear indication of what the core business is - what are the
products/services provided and which industry sector does it operate within.
This should be stated in one or two clear sentences as a maximum. If your
business operates in a “niche” environment or has specific unique selling
points then state them clearly

3. C/V’s and business experience of the main people who will run and drive the
business. Ensure to stress any relevant experience that will help to ensure
success and explain who within the team will perform which responsibilities (if
appropriate)

4. What are you seeking to achieve through the business? Where do you want
the business to be in 5 and 10 years time and what strategy will you pursue
in order to achieve this?

5. Confirm the amount of facilities being sought and be specific about the
purpose. Remember that the bank will look to fund capital projects by way of
Loan and day to day Working Capital by way of Overdraft/Invoice Financing.

6. Operating analysis i.e. how does the business operate on a day to day basis
and, in particular,
- Main suppliers if appropriate
- Highlight main (or proposed) customers
- Confirm agreed terms of trade both on supply and demand
side
- Main competitors

7. Financial Analysis; If you are an established business you will be expected to


provide the last 3 years Accounts as a minimum. If a start-up it is important to
include details of what the opening Balance Sheet will look like because this
sets an important starting point both for yourself and the Bank. You will also
need the following

- Profit And Loss Account Projections covering the next 3 years


– this to clearly show projected Sales levels, costs, margins
and anticipated profits. If your sales projections reflect

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significant growth trends (particularly when related to actual
recent performance) it is critical that you justify these and
clearly explain the rationale in support of your optimism! Banks
will see far too many projections that reflect strong future
growth but bear little sense of reality when scrutinised. Do not
fall into this trap because your credibility will be severely
damaged.
- Projected Balance Sheets for each of the next 3 years which
should reflect the profits as per the P & L. Banks will look very
closely at the amount of overall profits that are to be retained
within the business to fund future growth as against what the
owners are looking to withdraw either by way of remuneration
or year- end dividends. The more profit that is retained the
stronger will be the Balance Sheet and from a bank
perspective this will also show the commitment that the
owners have in the business.
- Cashflow Forecasts covering the next 3 years. The important
consideration is an understanding of the critical difference
between “profit” and “cash”. It is certainly possible for a
technically profitable business to be unable to continue to
trade because it has run out of cash and if you are able to
display a clear understanding of the difference between the
two, your position will be strengthened. Some common issues
regarding Cashflow Forecasts from the bankers perspective
are as follows;
-
- They very often reflect a far too rosy picture with Overdrawn
positions quickly turning into very substantial credit money
scenarios which do not then reflect the level of facilities being
sought ie why would they agree to the provision of a 5 year
Loan if the Cashflow is showing a build- up of credit monies
sufficient to repay within 12 or 18 months?
-
- Some month-end positions often show Overdrawn balances in
excess of Overdraft lines being sought without any explanation
of the implications
- Opening bank account balances reported incorrectly
-
- Loan repayments for proposed facilities either not included or
shown at incorrect levels

Conclusion

Armed with a Business Plan covering all of the above issues, your chances of
success will be much enhanced. Remember, however, that you will undoubtedly be
challenged and questioned on the content and a very clear need, therefore, to ensure
that you fully understand and endorse it in totality. Too many issues arise because
Business Plans are either produced for business owners without sufficient input by
the owners themselves who then display a lack of detailed understanding under

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scrutiny.. At the end of the day it is your business and it is probably only you that
really understands it and has the passion for it so do make sure that you agree with
and understand the content.

A strong recommendation is to refer the Plan to a banking specialist with detailed


banking knowledge before approaching the bank. Remember also that presentation is
absolutely key and also that questions asked need to be responded to professionally
and without delay in order to move the decision-making process on smoothly. A
banking specialist will also look to ensure that proposed debt structures, financial
covenants and, most importantly, pricing are challenged to the customers benefit.

By making the decision making process easier for the banks the chances of positive
outcomes will be significantly enhanced!

IT’S YOUR BUSINESS - SHAPE IT!!!

Rob Oades is a banking specialist with many years experience of working within the
sector. To seek advice regarding your business banking needs, or to comment on the
above article, please respond to roboades@etospartners.com

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© Etos Partners 2012. All rights reserved

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