HM Treasury figures highlight problems facing SMEs looking to borrow

Mark Halstead

New figures released by HM Treasury highlight the growing challenge faced by small firms in the North West in borrowing cash for expansion or investment.

Since November 2016, nearly 19,000 small businesses who were rejected for finance from one of the big banks have been referred to the Bank Referral Scheme, which was launched by the Government.

Under the scheme, firms are referred to three Government-designated finance platforms: Alternative Business Funding, Funding Options and Funding Xchange where alternative lenders are then identified.

The scheme was introduced in response to evidence which shows that SMEs tend to approach their main bank when seeking finance and that, if rejected, many simply give up rather than seek alternative options.

According to a new report published by HM Treasury, more than 900 businesses have secured in excess of £15m of funding.

This means that over the past 12 months the policy has helped a further 670 businesses raise £12m of funding.

Since the fourth quarter of 2017 the conversion rate for SMEs who make contact with a platform has been more than 10%.

However, just 75 firms in the North West were identified as having benefited from being funded at an average value of £15,085.

And data from North West insolvency expert Begbies Traynor illustrate the problems facing business owners.

Since the scheme was set up in the fourth quarter of 2016, Begbies Traynor revealed that 84,707 firms across the region had experienced “significant financial distress”.

Experts in the region say more work should be done to prepare businesses for applying for loans in the first place.

Mark Halstead, managing director of Red Flag Alert, the business intelligence service which is based in Oldham, said: “More work needs to be done to draw attention to this scheme and business owners need to understand their own credit rating before applying for a loan to further improve their success rate.

“Business owners have to take some responsibility for de-risking their own business for lenders.

“Too many company owners misunderstand their own financial reputation which is leading to a high failure rate of loan applications to banks and alternative lenders.”

He added: “Loan applications at mainstream banks are instant and automated. It pays to know the criteria the computer is looking for when it scans the risks associated with getting its money back.

“Decisions are often not made in branch, but by separate credit teams.”

He said: “Long gone are the days where the local bank manager would wave through your loan application on the strength of a personal relationship.

“The key to a successful business bank loan application is to fully understand the strengths and weaknesses in your own business and plug the gaps before making an application.

“Addressing issues in the perceived and actual risks involved in lending to your business will boost your chances of getting a loan from banks or alternative lenders.

“Business owners should take a closer look at the way their firm is perceived financially to see a better chance of securing a loan on good terms.”

Murray Patt, founder of Manchester-based accountants Alexander Knight & Co, added: “Funders will also look at the quality of a management team and the people leading the business as a key part of their criteria.

“The figures relating to the actual quantity of deals funded through this particular scheme are low, but it is slowly heading in the right direction.

“Getting a bank loan is an important step for any business, and being prepared before making the application will pay off with faster decisions being made and better terms being agreed.”

Five tips for SMEs to succeed in getting a loan first time:

1 Know your own personal credit score and improve it. Lenders take into account the creditworthiness of the individuals connected to the business. If you’ve got a bad credit rating as a company director it will hamper your access to funding for your business.

2 Review the quality of your customer or client base. If your client base consists of blue-chip companies you’ll get easier access to cheap money. If it consists of small companies and sole traders then it will be trickier to get the best rates. Remember that companies move up and down in terms of creditworthiness. Carillion and House of Fraser are two high profile examples.

3 Get firmer with your aged debtors. Lenders will look at the speed your customers pay and how frequently they pay as well as how much. The quicker you get them to pay the more lenders like it. Don’t allow lenders to be more knowledgeable about your customer base than you.

4 De-risk your business to the bank by having an accurate and up-to-date valuation of your assets. Property, machinery, equipment as well as cash in the bank all provides comfort to a secured lender. Many increasingly demand personal guarantees outside of the business.

5 Be patient. Wait until your business is at least two years old before expecting a loan. If you are still trading after two years the risk of lending to your business drops dramatically because you will have built up some credit history. Don’t expect anyone to lend to you easily if you’re a start-up no matter how good your idea.

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