The SME Owner’s Podcast – S1 E1 – “Are you fit for funding? Top tips from B2B Banking expert and latest Rowan recruit Iain Duncan”

Rowan’s inaugural Podcast is here! Host Paul Waite, MD of Rowan will host a series of Podcasts aimed at the SME owner.

Season 1, Episode1 kicks off with:

“Are you fit for funding? Top tips from B2B Banking expert and latest Rowan recruit Iain Duncan”

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Apple: Coming very soon!

At some point, most business owners will need to look externally for funding, whether this is to help with start up costs, supporting growth or effect an exit when the time is right.

It is so important to understand what debt providers are looking for when considering whether to support entrepreneurs for funding. It is important to consider the current economic climate for context. In 2020, a record value of lending has been provided to UK SMEs by institutions, through the government backed coronavirus loan schemes.

As of 21st February 2021, c1.6 million loans have been approved via these schemes, at a value of c£73 billion. Overall, UK SME lending balances have risen to £213 billion (£168 billion – 2019), whilst Private Equity investments have also grown by 9% to £8.8 billion v 2019.*

Businesses looking to approach a bank for funding should focus on what Iain calls the 5C’s, namely: Character, Capital, Capacity/Cash Flow, Conditions and Collateral.

Whilst Banks may provide loans to companies, at the end of the day the bank Manager is backing the people behind the company.

Character is, therefore, the most important and heavily weighted of the 5 C’s, in Iain’s opinion. Whilst banks and debt providers ultimately lend to limited companies, it is the owners and principal controllers that the banks are actually backing, and relying on. Lending Managers want to know that the people running the business have honesty, integrity and the skills, competence and attitude to be successful in business. They also want to know that, if the business’ financial position deteriorates, they will honour the company’s and their commitments to the Bank.

It is vitally important that lending applicants can evidence the following points to the bank:

A good track record, not only of financial success (which may be evidenced by historic year end accounts), but also with its customers, suppliers and stakeholders. Positive views and opinions in the market in which it operates, from competitors of the business and its owners.

A good existing or past relationship with the company’s bank/lender, and that commitments have been kept, for example, covenants complied with, loan repayments made etc.

Good general credit history of the business and its owners/principal controllers. The latter should not be underestimated; if the owner, has for example, defaulted on a personal loan recently, or has financial difficulties, then this will definitely taint the opinion of the business lending Manager when reviewing an application for funding.

Banks will want to see that the company pays within terms to its suppliers, that there are no CCJ’s or defaults registered (to the company and individuals) and that the relationship with HMRC is good. Also of importance is the culture of the business, what it stands for, how success is measured and how the staff feel about working for the business (for example, reviews on job websites).

Providing CVs for the owner and the principal controllers is a great way of evidencing the skills, attributes and experience of the key people involved in the business to your Banker.

If Iain was to sum up what an A+ business lending applicant would be, it is effectively Sir Richard Branson, married to Mother Teresa with a joint account – in essence a borrower with both the proven ability to repay as well as the morals to actually do so!

Capital, or stake at it is often called, is the amount of money, whether that be by formal share capital or shareholders’ loans, that business owners have invested into their venture. Banks want to see some ‘skin in the game’ or commitment from business owners.

After all, if an entrepreneur is not willing to back his or her business in cold hard cash, why should a Bank? Funding providers will want to see the Owner’s commitment to their business. This is a key consideration for lending managers, and it’s vital that it’s evidenced by funding applicants.

Capacity – lenders will want to assess the businesses’ ability to repay a loan based upon historic, current and future cashflows. Owners should ensure that they have robust business plans, including detailed explanations of historic trading/cash flows and the assumptions behind forecasts (be prepared to provide a minimum of 2 years forecasts) – the more certain that future revenue streams are perceived to be, the better.

Conditions – this is the state of the business, the industry it operates within, the broader macro- economic outlook and how these factors might affect the company’s ability to repay a bank facility.

Whilst individual business owners can’t control the economy, they can plan ahead. Although it might sound counter-intuitive, it often makes sense to apply for working capital funding when the business is strong and may not have an immediate or short-term need. Banks will often be more amenable to providing funding when it is not needed. If conditions worsen, funding lines may be cut, but at least there will be some cushion.

As a Finance Director of a strong, well-capitalised North-West business said to me recently when referring to his overdraft request, “it’s like having a warm blanket available to you for a cold day”.

Collateral, or Security as it is often known, is assets (whether the businesses or a 3rd party’s) used to guarantee or support a bank facility. Property is the most traditional security, but value can also be attributed to other assets in a business, such as non-perishable stock and good quality trade debtors.

When approaching a bank, applicants will need to evidence that there are potential secondary sources of repayment for the funds being requested, the first source of repayment being the cash-flow generated from the businesses trading. Collateral is the last of the 5 Cs, and whilst security doesn’t make a ‘bad’ proposition ‘good’, it certainly helps the lending manager to cement a favourable decision, as well as potentially having a positive influence over the price, i.e. the interest rate or fees, of the funding.