The global financial crisis ushered in a new era of risk aversion at banks that calls for a more formal and systematic approach to getting a business loan. And it means that the role of the adviser is more important than ever. Most owners of small and medium enterprises will need professional assistance when it comes to getting their accounts in shape and preparing a business plan for presentation to a banker.
What are the hurdles?
Market researchers, industry analysts and bankers cite a list of hurdles that trip up SMEs in their quest for funding. These hurdles include short-term thinking, an inability to forecast and a lack of time to manage what has become a much more demanding lender/borrower relationship. Increasingly, lenders are asking for proof of exit or succession planning to accompany financial reports and business plans. And many business owners fail to evaluate the most appropriate type of finance for their company.
Commercial lending commitments totalled $30.2 billion in October 2010. Some 27 months later, the figure for January 2013 was $30.3 billion. Australia has seen almost no lending growth since the financial crisis.
Commonwealth Bank’s most recent Future Business Index suggests that SMEs have a low-risk appetite, and it expects to maintain a reduced demand for borrowing on average.
But those who do want to borrow will need to prepare for an extended process.
Simon James, a corporate advisory partner at the accounting firm HLB Mann Judd, works with family businesses. He confirms that the hurdles are higher than they were before the GFC – loans might be easier to come by than they were immediately after the crisis, but lending criteria are “still stringent”.
Think long term
James says the biggest mistake that businesses make is thinking short term. “One of the things that goes wrong all the time is that SMEs expect things to happen a lot faster than they do,” he says. “They need to allow plenty of time for their credit applications to go through.
“Often they slip up because they are not very good at forecasting. They don’t see what’s coming down the road.”
The chief executive of banking industry market research company East & Partners, Paul Dowling, says SMEs have not fully recognised how much their relationship with banks has changed and the amount of time that is required these days to maintain it.
“The days of ringing up and asking for an extension of a credit line are over,” he says. “What banks are saying is that SMEs need to have a professional business proposal in place. They are looking for SMEs that can present in a businesslike manner, give a coherent description of their business plan and be clear about what they intend to do with the funds they are seeking.
“SMEs have to get on the front foot and think about how they can support their finance applications.”
This, he adds, takes discipline and can be an intensely time-consuming process. “We see a large number that walk away because the extent of documentation required and the interrogation is too hard.”
Dowling agrees with James that many SMEs tend to be too short-term in their focus and too reactive. “The sort of thing that happens is that they hit a cash-flow problem and turn to the bank for an extension. Banks don’t respond to that now,” he says.
