Changes to Business Lending - a timely reminder for SME’s
Early in the year "The Carnell Report" was released following a government enquiry into bank lending to small to medium size enterprises (SME’s). The report found that rules surrounding lending to SME’s were heavily weighted in favour of the lenders. Commercial lending is a complex area regardless of the size of the business. Although many poor business decisions can be made by owners , the report found that business operators were restricted by lop sided loan contracts which allowed lenders to ‘’move the goal posts’’ with minimal or no recourse for the SME borrower. The report has made (15) recommendations which focused on the following areas:-
Insufficient time frames set around loan milestones
A gap of knowledge & misleading information between front line lending sales staff & back end credit assessment areas.
Lack of transparency in dealings with third parties, as in valuation services, accountants, receivers etc.
No recourse for SME’s other than through the court system & lenders have deep pockets.
One of the most significant of the recommendations was for the establishment of an external dispute resolution scheme for SME borrowers.
This report again highlights the need for good advice to be provided when SME’s are seeking funding for a new or existing business venture and whilst many of the focus areas cannot be fixed overnight, if the preparation & positioning of the business is effectively 100% from the get go, then they stand the best chance of having funding needs met, & for their long term viability to remain. Here are some questions that an SME operator should ask & have answers to prior to seeking finance:-
Is there a completed business plan in place which includes a strong marketing plan & cash flow projections?
Does the cash flow projection reflect a sensitized or breakeven position & are there accompanying assumptions/notes to it?
How much reliance on debt should there be in the business ? In other words what’s the right mix between debt & equity?
If debt (a loan is involved) what structure, loan term etc should it reflect? Rule of thumb long term loan = long term asset, & short term loan = short term asset.
What sort of risk protection is in place for the owners?
What if any collateral, is being provided by the business?
Will there be an operating lease in place for the business , shop front etc? If so this can impact on available loan terms for finance.
What are the business’ terms of trade like? Paying creditors / suppliers & receiving funds from debtors (clients).
What’s the mix of the business’ clients like? Is there a heavy reliance on one or two main clients? The same applies on the supplier side.
Is my range of product/service diverse or singular? Is there potential to integrate or bring in complimentary service/product?
What industry sector do I predominately sit in? eg. Retail, Manufacturing, Hospitality, Finance, technology, Government etc. etc.
Am I eligible for government grants?
These are just some, not all the questions that a SME operator or for that matter any business owner should be asking of themselves prior to approaching a lender for finance. This list merely serves to trigger thinking on the subject.
Michael Clarke of COMPASS Lending & Finance is always available with assistance to SME’s in respect to their funding needs.