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How to Get the Best from your Bank – Top Tips for SMEs (Part One)

Since the economic downturn of 2008 and the resulting recession, banks have become much more cautious in lending funds to businesses, particularly smaller businesses here in the UK.   The government has also weighed in with much more stringent regulations when it comes to the amount of capital banks are required to retain in order to withstand economic shocks and these new rules mean that smaller businesses are finding it difficult to obtain bank loans when they need them.  With another downturn predicted we’re taking a look at how SMEs here in the UK can develop a good working relationship with their bank so that they have access to loans when they need them.

While bank finance remains the most popular source of finance for SMEs, there are other finance providers out there that you can turn to – a quick chat with your accountant will provide you with alternative sources of lending.

If you need to raise finance for your business for whatever reason, then you’ll need to consider the following questions carefully:

  • How much money do you wish to raise?
  • Are you able to offer security over a business or personal asset?
  • How will you make the repayments?

Here are some factors to take into account if you need to raise finance from your bank:

  • How a business manages its current account will be closely monitored by the bank so you need to keep records of transactions up to date and reconcile your financial records on a regular basis.  It’s vital that you know your business current account balance at all times and anticipate any changes in the coming months.
  • With banks taking a more cautious approach on credit decisions, these are usually made at head or regional office level nowadays.  This means that it could take longer than you expect so always allow at least a month to obtain finance from a bank.
  • Your bank will need information in order to make a decision on whether or not to lend money to your business.  This information includes past financial statements, up-to-date management accounts and forecasts of future trading, cash flow and balance sheets covering the next two years at least.  Some bank websites have software packages that you can use for these forecasts or an accountant can help you with these before submitting an application for a loan.
  • Banks use behavioural scoring data (how bank accounts are managed, facilities repaid, etc.) to assess the risks of lending to businesses.  They will also access information from credit reference agencies – such as late payment of bills and county court judgements.  If your business is a limited company, finance providers will be looking at the directors’ credit history too.
  • The bank will communicate its decision to you, and this is best done in a meeting which will enable you to ask questions on any terms and conditions attached to the offer.  You need to fully understand the type of finance on offer (whether it’s a loan or an overdraft) and, if a loan, the fixed period repayable.  Loans often have conditions attached which may trigger a demand for immediate repayment in the event that they are not met.
  • If you’re refused credit or have issues with the terms and conditions of an offer you can use your bank’s appeals process against the decision.  The appeal will be considered by a separate team within the bank and you may need to provide more information in order to get the decision overturned.