Where do SMEs look for the next round of funding requirements

Now that the business and the economy has moved beyond the pandemic, with funds available from banks being accessible through Government Covid supported lending, where do SME’s look for their next round of funding requirements? Craig Manson, one of our SME partners puts some questions to Paul Grace, from YB Financial Advisory Limited, a commercial finance broker.

What do you think is the banks' current appetite to lending?

I’m generally seeing banks supporting their existing customers well, but with a limited appetite for new customers. There is also a degree of caution around the construction and hospitality sectors at the current time. 

Key area banks are now looking at is the wider impact of any Covid related lending (CBILS, BBLs) against their customer’s loan covenants, where they have taken these loans from different funders. If any business has taken additional funding from an alternate lender they should look carefully at their covenants with their existing bank.

Some banks also appear to be taking the view that SMEs are in financial difficulty because they have taken these types of loans, when in fact this was not the case, the additional loans were taken due to uncertainty during the global pandemic.

The challenger banks continue to be hungry as they look to grow their own balance sheets and seek a greater market share.

How are these challenger banks compared to high street banks? Are they looking for anything different from the traditional banks?

There are new challenger banks coming to the market every day, which is great to see and increasing competition amongst banks generally. These banks tend to be more product-specific and charge slightly higher interest rates than their High Street peers but usually offer a much quicker credit turnaround by having fewer layers of bureaucracy. 

Information requirements tend to be the same, however, some of the new fintech challenger banks simply look at historical information i.e. Bank statements, financial accounts and credit rating to make a credit decision. I’ve seen loan approvals come through in a matter of minutes from these fintech challenger banks.

Challenger Bank technology also appears to be far superior to their High Street equivalents with new banking platforms coming to the market as opposed to dated technology that I see from High Street Banks.

Is it worth shopping around for new lending, or sticking with an existing bank? Are there incentives to switch?

I’m a great believer in relationships and track record so if it’s working well, why fix something that isn’t broken. However, like all services, sometimes providers lose their competitive edge and the competition offers better rates, products and services. I recently worked with a customer who sourced a more competitive deal with less security from a new bank, rather than their existing bank with whom they had an exemplary track record.

Incentives tend to be offered at the lower end of the market i.e. 25 months of free banking, but you should always look to negotiate around loan arrangement fees, interest rates & renewal fees.

What are the banks looking for in an application?

Bank’s lending decisions, in my opinion, are often made on several factors with the top 3 being;

1. the business’s cash generation and therefore ability to meet loan commitments,
2. amount of security the business and potentially personally, you are prepared to offer and
3. the management team and their track record. 

It is important to provide the bank with accurate historical, current (management accounts) and forecasted financial information so that they can see sufficient cash being generated to repay any loan facilities.

Banks take huge comfort from a management team so the production of a business plan will always give them confidence that you know your business, the sector in which you operate and the opportunities & threats that you see in your market.

Finally, banks always want to look at Director / Shareholder personal assets and remuneration taken from the business. Excessive personal commitments/lifestyle means more potential drawings which may put more pressure on the cash flow of the business.

How can a broker help?

Brokers are often ex-bankers with a lot of experience and therefore know how banks “think” and can pre-position lending requests well, therefore ensuring any potential weaknesses are mitigated and fully explained.

They should also be able to prepare a concise funding report which makes the Banker’s job easier to achieve a credit approval and therefore make the process as smooth as possible and efficient.

Brokers also know the funding market, as there are literally hundreds of banks, challenger banks and fintech providers, so they will know which of these funders have an appetite for different sectors and also different funding requirements i.e. cashflow finance, MBO funding, Commercial Mortgages, Asset Finance etc. etc.

Here at YB Financial Advisory, our team have over 50 years of banking experience across a number of Banks that have operated in every sector across the industry. We are registered with the FCA and members of the National Association of Commercial Finance Brokers.

Many thanks to Paul for his insights into the market which we hope that you find useful. For any further information, please call Paul Grace on 07854119277, or email paul@ybfa.co.uk.

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