Securing finance can be a frustrating process. We asked Roger for his insight into the measures SMEs can take to better their chances of securing finance, and what proactive steps the government and banks could take to make sure all businesses that need funding have access to it. And, of course, how things work at RBS...
Tell us about yourself and your work at RBS. How does your role involve SMEs?
I've been at NatWest and then at RBS for 28 years. I've worked pretty much exclusively in the commercial division of RBS, which focuses on SMEs. These are businesses with a turnover of between two and fifty million sterling.
I'm the Regional Director for the London business for NatWest and I look after six sectors: retail and wholesale, technology and media, charities and not-for-profits, professionals, consumer industries and leisure. We look after about 5,000 SME businesses across those sectors. We provide very specialist advice in all of those sectors. All the managers are accredited in their particular sector with external qualifications. They offer specialist knowledge as well as the normal banking suite of services.
What is the best advice you can give to SMEs looking to borrow?
The best advice is to plan well and think in advance. Short-term needs do come up unexpectedly but SMEs tend to come to us late on in their thought process. If you do think you might have a borrowing need – whether that's for capital asset purchases, cash flow funding, or property purchases – talk to your bank as early as possible. Then they'll work with you in terms of shaping and forming what you need.
It's important for SMEs to have a clear strategy behind the borrowing. Any bank wants a full picture of the SME in terms of past trading. They want the ability to look back two or three years and look forward too. That's where a number of SMEs don't sell themselves as well as they could do.
We place a huge amount of importance on the management of the business. Through our sector expertise we have insight into what’s happening across the sector. The management is absolutely critical and any delay does reflect on the management of the business. Being well prepared and having the foresight to enter that conversation early is a strong indicator that the management are well prepared, well informed and they have a clear strategy in terms of looking at a lending proposition.
What’s the typical profile of a successful business that seeks finance from you?
It really depends on the sector. A business in the leisure space could be very different to one in the technology or media space. They'll have very different profiles; they'll have a different strategic plan; they will have different cash flow dynamics.
A good business looks well managed and well prepared, with a clear strategic direction. They must be able to show, through the financial information they provide, that they have an ability to service the debt they're looking for.
Is it a well-structured management team, with a good set of skills covering all facets of the business? Do they have non-executives giving them independent feedback? Are they well prepared, with a clear strategy?
We are keen to ensure that where we do lend, we lend responsibly. If we lend where a business doesn't have a clear plan on how to service that debt, we're potentially creating more issues than if we didn't lend the money.
Can you indicate which sectors are most likely to be successful?
The sectors we are seeing that are growing above government statistics in terms of the growth of the economy are in the leisure space – pubs, bars, clubs and hotels.
Recruitment is also very strong; there are a lot of very aggressive expansion plans into overseas markets.
We're seeing growth in the retail and wholesale market, which is driven to a degree by people looking forward to a period of economic stability. We're seeing wage rises, putting more disposable income into the market.
Technology and media is growing very quickly. There's a lot of private equity money in the market at the moment. Investors see potential for much faster growth than they might see in other sectors and a quicker and slightly greater return on their investment, but carrying more risk.
We're trying to look at a way of "match funding". We may not be able to come in exactly pound for pound alongside an equity investment but we're looking to come in earlier than probably we would have done going back three or four years. We have a better view of that market and we're given confidence by the amount of equity coming through.
What information should a business have prepared before applying for a loan? Are there certain criteria that you look for when reviewing an application?
SMEs need a clearly defined strategy, which they can articulate, which underpins the reason for the borrowing.
They need a financial package, which allows any lender to look back over the past two or three years, as well as any up-to-date management information.
A full set of financial forecasts that look over a minimum of three years so we have a six-year view of a business from a financial standpoint.
It's important to say that we balance the non-financials alongside the financials. We look at it through the management, the customers, their suppliers. The financials don't always tell you the whole picture; they are not the only indicator that the business can service the borrowing.
When it comes to lending to SMEs, banks don't have a good reputation. Do you think it's warranted?
I don't think it is warranted. We look to be positive in terms of our appetite to lend when there is a defined need from a customer to borrow money. We probably agree to between 80 and 85 per cent of the propositions we are asked to look at. We may not always fund the business in exactly the way or for exactly the amount we were originally asked for. It may be a slightly different structure; it may use slightly different forms of funding – whether that be invoice finance on the debtor book or asset finance on some of the capital assets with a mixture of working capital and term debt. The earlier you get your bank engaged, the more they will be able to develop that dialogue with you to look at all the alternative solutions. And those might be external.
We would look to be supportive of all businesses that have a lending need. This is sometimes lost when statistics find their way into the press. For example, only 35 per cent of our customers are borrowing customers. The other 65 per cent, in the main, are happy non-borrowers.
What could banks do better with regard to providing finance to SMEs? What improvements are in the pipeline?
We're keen to counter the perception that banks aren’t proactive. A while back we looked at issuing a "statement of appetite" to customers who aren't borrowing, or who might want to borrow more. We look at all businesses every six months and send them a letter saying we have an appetite to lend or lend to them more should they have a need in the future. We've written to 2,500–3,000 of our customers.
What measures could the government introduce to make life easier for new and growing companies?
More could be done with the capital allowance structures. A lot of businesses borrow for one of two reasons: they borrow for working capital requirements, and they borrow to invest in capital, machinery, IT equipment, and so on.
The government could be more supportive around the capital allowances structure. They could be more creative at looking at certain asset classes and having a differentiated capital allowance structure that encourages investment in business infrastructure. That will create growth and, in turn, employment.
This isn't specifically about lending, but there's too high a level of red tape and bureaucracy around employment law, recruitment, health and safety... Sometimes growth has to be there before funding requirements.
Roger Fenwick, NatWest's Regional Director in London.
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