Why banks must rethink their approach to revolving finance for high growth businesses

Denise Friend, founder and head of corporate advisory at Friend Partnership, explains why British banks must change their approach to revolving finance for high growth and entrepreneurial businesses.
Give high growth businesses access to affordable bank finance and you’ll unlock growth in the UK.

Business owners can plan into the medium and long term and undertake the investment activities that will ultimately benefit UK plc.

This is surely hard to argue against, yet time and again we hear from our entrepreneurial business clients that they cannot access the bank finance they need.

In fact, obtaining the right form of finance to enable their business to thrive and grow is probably the most difficult issue that business owners have to tackle.

Raising finance is easy if the asset that you need to finance has wheels; likewise, if you are selling finished goods to businesses, you can obtain invoice finance for which the security is your debtor book. The amount that you can borrow is expandable depending on the size of your sales ledger. I have known many such businesses which have had dramatic growth and even cash in the bank, whilst being able to negotiate credit terms from suppliers.

But these forms of finance are generally unavailable to the high added-value businesses that our economy needs to encourage, such as those that have demonstrated sustainable growth and profitability, but that do not have the type of asset security that finds favour with the banks.

I don’t believe that the banks’ thinking on how to best support those businesses has moved forward for many years and, for me, this is the biggest single challenge for SMEs.

Large business has access to many kinds of ‘revolving’ finance, be it from a bank or by the issue of bonds. The business only repays interest for the term of the loan and often that interest is rolled up.

They may have to pay a greater interest rate to obtain this finance but the ability to grow their business without the drain of repaying debt means money can be put to better use and earn a greater return for the business.

That all works nicely if you make a profit of £5 million. But what about the vast majority of high growth, privately owned businesses that make somewhat less than £5 million profits per annum?

The parameters that work for businesses making £5 million profit can easily work for a smaller entity. Indeed, a company with profits of say £500k may be able to demonstrate that a revolving loan of £2.5 million would work for them and enable them to grow more rapidly.

Many owners of growing businesses spend huge amounts of time raising finance and then have to do it all over again when they can demonstrate the further growth that the banks did not believe at the time of the first loan. We need a grown-up debate about this.

It is simply not enough to set the bar high and tell people to come back when they have achieved £5m profit. By then they will have gone to alternative and more expensive funders when they did not need to.

Surely as a country our best interests are served by banks funding the wealth creating sector in structures that accord with what is best for them?

We have had various forms of government funding over the years. I don’t think it should be needed, but a small guarantee premium (and I mean small, say 0.5% or so) that would enable a company to access a revolving facility would be welcomed by business as a small price to pay to reduce the number of funding rounds and enable them to focus on what is really important.

The banks should not be at risk if that was in place. I lay down a challenge to the banks – to do what is best for the wealth creators of the country, or tell me why they can’t. I am open to debate.