Despite popular misconception, lending is the raison d’etre of banking. Banks compete to offer loans to businesses – lending more than #40bn to small enterprises at the end of 2000.
Some 80% of those SMEs applying for loans gain some form of finance from a bank with a shift in the last decade away from borrowing on overdraft to fixed term loans. Both parties require viable and practical loans.
It is not in the banks, or the business’s interest to lend money that cannot be repaid. All loans have an element of risk but it should be a manageable one.
The most flexible form of borrowing is the overdraft. It is ideal for accommodating time differences between payments made and monies received.
Its main disadvantage is that the bank can demand repayment at any time although some now have ‘committed’ overdrafts available.
Bank loans are suitable for longer-term investment, such as buildings, vehicles and machinery. The loan term is linked to the working life of the asset and repayments can be tailored to suit cashflow. It provides reassurance of knowing the cost, while variable rate loans enable businesses to benefit from reductions in interest rates.
Banks may ask for security for overdrafts and loans to ensure the business is committed to achieving its objectives, including repaying borrowing – security will depend on the track record of the business. Companies are asked for a mortgage debenture for overdrafts and term loans will usually be secured on fixed assets, such as premises. For companies with few tangible assets, directors may have to provide guarantees supported by personal assets.
It helps to obtain independent professional advice when seeking finance.
An external view can help business owners provide reassurance that the case for borrowing is robust. Shopping can also help.
To help businesses understand what to expect from their bank, the British Bankers’ Association has published an industry standard – the ‘statement of principles’. Copies are available from banks and from June 2001 copies will be given to businesses opening a new account.
Further information and help for small businesses can be found on the BBA’s new website. This provides information for small businesses on the process, raising finance and building an relationship with their bank manager.
The site can be found under ‘small businesses’ at www.bba.org.uk/businesses
– Andy Brenan is a director of the British Bankers’ Association.