How to get cash from banks

Spotless financial records, low debtor levels and a clear, easy-to-understand business case are three critical requirements for any SME that wants to get funding from a bank, a panel of business and finance expects has told SmartCompany.

While these expert say access to bank credit remains extremely difficult, companies willing to put in the hard work in preparing their pitch do have a shot at getting the cash they need to fund growth.

The economy might be recovery mode, but the credit crisis is far from over for SMEs. The most recent Sensis Business Index for the March quarter has found 35% of small businesses feel it is still difficult to obtain finance, while the recent results from the big four banks showed business lending fell across the board in the second half of 2009.

Little wonder then that Australian SMEs are having trouble even get in the door of the bank, as was shown by a recent CoreData report which found 25% of business customers who visited NAB had to make contact with the bank more than six times just to get an appointment.

Andrew Inwood, principal of BrandManagement, which owns and operates CoreData, says that while some banks are more open to business customers than others, the market is still very tight.

David Knowles, partner at Pitcher Partners, says conditions are improving but businesses will continue to struggle for some time – and they need to be prepared.

“Things have gotten better but are a long way from where they were since the GFC. Pricing is still way over the top for business loans, the margins are very challenging for smaller companies, especially with rising interest rates.”

How the banks are thinking

The business banking market has changed so rapidly in the last 18 months that many businesses were left mystified as to why their once friendly bank manager suddenly went cold. Experts say the thaw is only just beginning.

Tim Lea, partner at Cashstream Financial, says the market has moved from essentially playing “a commoditised game of chicken” with lending to directly refusing a large number of applications.

“The way I’m seeing it is that a lot of the banks are talking a good game in terms of saying they are open for business, but the actual reality I see is that they aren’t in credit mode. I don’t think we’ll see any marked improvement until the end of this year.”

Inwood points out that due to the difficult state of credit market in the US and western Europe, the banks remain easy targets. 

“The banks went through their books and found several guidelines they could enforce. They found many loans which were outside of their covenants, naturally, and requested a whole lot more additional information regarding forecasts, business plans. In the end, a number of loans were restricted.”

Knowles says much of the damage has been caused by the downturn in property and that any recovery in SME lending could be led by an upturn in the commercial market.

 “A valuer is not prepared to say something is worth more than what the market is trading out, even though 18 months ago it might have been 20% more. Banks are hesitant to lend against that.”

But analysts such as David-Green Morgan from DTZ Research have said while commercial property is recovering, it will take some months before credit starts flowing freely and banks begin to ease up.

The bottom line – getting a loan is still a huge challenge.

Step one – look inwards first

Despite this bad news, industry experts say credit can be found if SMEs are willing to put in the hard work.

But first, Markwell warns businesses and entrepreneurs to have a long, hard look at whether their need for funding is a temporary problem or evidence of some serious internal issues.

“A lot of people have attempted to fix internal cashflow problems by seeking additional financing, but if they ran their businesses better they might not have needed it in the first place.”

D&B director of corporate affairs Damian Karmelich also points out businesses can reduce pressure on working capital by paying debts on time and maintaining good relationships with suppliers.

“If businesses just pay their bills on time, and other businesses help them out in return, that can reduce many of the pressure that might lead them to seek funding.”

Step two – demonstrate a solid business case

Before any meetings at the bank are arranged, these veterans say there is one thing every hopeful business borrower needs – consistency.