Barriers to Bank Finance
We are discussing bank finance, but I have a confession to make – I hate banks!
Apologies to any bank employees reading this, but I think banks are simply a necessary evil that we have to endure in modern society. After all, what do they really do? They just borrow money from you, pay a small amount of interest (if any) for the privilege, and then lend it back to you at a higher rate.
They add little real value – and their customer services standards are generally rubbish!
Banks are supposed to be businesses, but – as we are all experiencing –bankers’ inabilities to make good business decisions have led us into a worldwide economic disaster. In good times, many banks make extremely bad lending decisions, because they are so desperate to grab a piece of the action, and when times are bad, they stop lending completely, even though these are the times when people really need the money!
That’s one of the saddest things about this recession; many companies – from Northern Rock to lots of small local businesses – are failing not because they don’t have enough customers or they are not good businesses, but simply because they can’t access bank finance and get reasonable lines of credit to maintain good cashflow. Many businesses are finding that the credit facilities previously available to them have now been removed, creating financial difficulties and – in too many cases – business failure.
That’s the strange thing about money – and bank finance in particular – when you really need it, that’s the time when its hardest to get and when you don’t really need it, getting access to it is simple. It sounds illogical to lend money more to people who don’t need it, but when your profitability is based on the difference between the rate at which you borrow and the rate at which you lend, you will of course be keen to ensure that you lend to people who can pay you back. It’s called `risk management`.
Banks are highly conservative organisations, unwilling to take risks – as anyone who has ever attempted to get a loan to start a business will have discovered. The problem is that this conservatism often clouds judgement as to the feasibility of a business idea and stifles entrepreneurial activity. Minority businesspeople often complain that banks are discriminatory because they won’t lend them money, but the truth is much more mundane – banks are just paranoid about lending money to those who cannot display an obvious ability to pay.
It’s a combination of greed and conservatism that has led us into this economic nightmare – American banks were so keen on getting more market share during a period of rising property prices, that they started offering mortgages to extremely high-risk groups. Then, in order to remove the associated risks, they sold the debts on to other banks, creating a chain of exposure to bad debts that stretched around the world. And now, when we need to free up credit to kick-start economies, banks are sitting on their funds and refusing to `oil the wheels` of business.
So what do you do if you are desperate for business finance at the moment? Well it’s still necessary to try the banks first. They are the primary lenders and other institutions won’t usually consider lending to you until you have exhausted those options. Do your homework before talking to a bank and ask them about the Enterprise Finance Guarantee, which is a new government scheme to guarantee up to 75% of any loan amount. This is supposed to be available to businesses that do not have enough assets to offer banks as security for loans.
Alternatives to bank finance
How successful this will be in persuading banks to lend to more businesses remains to be seen, but it’s worth a try. And if you are unsuccessful in accessing bank finance , there are a number of other potential finance sources such as CDFIs (Community Development Finance Institutions) that can possibly help you. An excellent resource for business finance information for West Midlands-based businesses, is WestMidlandsFinance.com. You can just log onto the site, enter your details and requirements and it will give you a list of available sources of finance open to you.
Remember, in difficult times money doesn’t disappear – those who have it just start hanging onto it, which means you need to work much harder to get it!
(Article first printed in the Vine Magazine, March 2009)