Weekly Blog by Philip King, CEO of the ICM - 'Making business add up'

I've been catching up on reading that accumulated while I was on holiday and had a look at the SME Finance Monitor over last weekend; the full document can be found here: http://www.sme-finance-monitor.co.uk

 

A few interesting statistics struck me: 43% SMEs are using external finance, compared with 51% a year ago; 34% of loan and 21% of overdraft applications were declined; banks offered alternative funding or pointed to alternative sources of finance in just 9% (loans) and 13% (overdrafts) of cases; 70% of those declined felt the advice they received from the bank was poor and 25% were not given reasons for the decline decision. Almost more alarmingly, only 8% (loans) and 14% (overdrafts) of declined applicants were aware of the appeals process even though it's been available for well over a year now, and just 47% were aware of any of the Government's lending initiatives, of which the National Loan Guarantee Scheme is but one example.

 

So we still haven't fixed the problem that banks (and the Government) aren't communicating adequately with the SME community, and the message persists, particularly from the media and some business organisations, that banks remain reluctant to lend. But we do also need a sense of balance.

 

I've just started listening to Jonathan Moules' book 'The Rebel Entrepreneur'. Jonathan has been Enterprise Correspondent at the Financial Times for several years and he makes the point in an early chapter that, although the banks may seem reluctant to lend, there is a balancing argument that says the current economic situation is in part due to banks lending when they shouldn't have done so, and on terms that were unsustainable. He argues that many businesses do not merit being lent to, and gives examples of very successful businesses that achieved their growth by managing in the early days on a shoestring and refusing to incur debt that could sooner or later become a millstone. If the banks don't impose sensible lending policies, we'll be in danger of repeating the cycle all over again.

 

I'm an avid follower of Dragons' Den and it's hard not to be frustrated by entrepreneurs who clearly have a brilliant business idea but cannot remember, or worse do not know, the salient financials on which their request for funding is based. If someone cannot say how much the business turned over or made/lost in the recent past, then why would anyone have the confidence to risk their own capital? Talking to bankers I hear many examples of businesses who seek funding based on a business case that is at best unrealistic and, at worst, simply doesn't add up (literally).

 

Just as businesses have to help themselves by applying basic credit management principles, so they need to think through their plans and ensure they put together a business case that is realistic and believable before they ask for funding. The more information they provide, and the better it is, the greater their chance of success.