Small to medium sized businesses wanting a return to the days of free-flowing bank finance need to focus on better communication and stronger relationships with their lender.
It has been widely reported that the big four banks are demonstrating a trend away from small business lending in preference for housing mortgages, which they view as more secure with better returns.
Business owners need to get their heads around presenting themselves as lower risk, secure business partners to compete in this landscape.
The first step is to improve their communication with the bank by increasing the level of detail they provide.
It surprises me how many small business owners fail to prepare a satisfactory application for finance by forgetting to outline the basics - how much money they want, what they want to use it for, and a projection of how they intend to repay the bank.
Businesses that can present the “three Cs” to a bank - character (industry profile, good reputation), collateral (assets for security) and cash flow (proven record of profitability) – are likely to have a much easier pathway to gaining finance.
The issue of SME finance has also been highlighted in the recently released Murray Financial System Inquiry interim report, where information asymmetry was identified as a major barrier to obtaining bank finance.
Information asymmetries occur when one party has different information to another in a transaction, which affects how each party expects the transaction will unfold.
Unfortunately this communication break down generally results in the lender deeming the borrower as higher risk than the borrower might anticipate, creating a higher cost of funds to the borrower in the form of higher interest, or excessive covenants being put in place such as quarterly reporting.
In my experience, frequent communication and well prepared documentation is essential to reducing information asymmetry, as is matching a business with a lender who is knowledgeable with their industry.
This is becoming more difficult with banks reducing resources, often resulting in bankers having less time to meet with clients, and gain a proper understanding of their business and industry.
I’m seeing many bank relationships with clients watered down as a result of this, which is a worry because it increases the information asymmetry issue.
It’s worth having your professional adviser assist with the financial transaction to reduce information asymmetries as much as possible.
As with many things in business, having the right people working together makes all the difference.
But the fact is, banks will continue to favour retail customers unless SMEs can find a way to demonstrate they are a more secure proposition.
Chris Gebhardt is the business advisory director, William Buck Chartered Accountants and Advisors
